The great recession and the tightening of lending standards that followed put a new car out of reach for many consumers. However, now lending standards are loosening – and that’s helping raise new car sales. What’s not clear is if easier credit is good news for consumers.
Automotive News reports that lower lending standards, longer loan terms and more leases are key parts of what’s helping new car sales grow. The average length of a new car loan is now 65 months, Automotive News writes. Also, in the second quarter of 2013, car buyers with subprime credit scores (a score of 680 or less on Experian’s Scorex Plus scale) made up 27.4 percent of new car loans. According to Experian, the average U.S. credit score (VantageScore) is 736. VantageScores range from 501 to 990. CNNMoney reports that in 2012, 14.2 percent of consumers fell into the lowest range of credit scores generated by FICO (300-549). FICO scores range from 300 to 850. Though FICO and Experian use different scales, with 14.2 percent of the population having poor credit and 27.4 percent of new car buyers having poor credit, it would appear that subprime borrowers are overrepresented in current new car sales.
While lower lending standards can help someone who has had financial troubles rebuild their credit and get the car they need, some analysts fear that, like the housing bubble, easy credit could lead to a car sales bubble. With predictions for new car sales to top 15.5 million this year, car makers have ramped up production to keep pace with demand. If interest rates rise, car loans will become less affordable for consumers, crippling demand. If demand falls, automakers will have to offer deep discounts to stimulate sales. Those discounts will cut into carmaker profits and could trigger aftershocks throughout the automotive industry and the rest of the economy, much like what happened in 2008 when the bottom dropped out of new car sales as the recession hit.
Even if interest rates remain low, easy access to credit isn’t always good news for new car buyers. Longer loan terms and more lease options make new car monthly payments more affordable, but they can also get a consumer into a car he or she couldn’t otherwise afford. While that can be tempting, if you’re shopping for a new car, think about the impact of a long loan with low monthly payments. Sure, you save money each month, but you’re likely to still owe money on the car when you want to trade it in, and can end up paying more in interest than if you had a shorter loan. Also, with a long loan term, it’s likely that you’ll owe more than the car is worth for quite some time. That situation can be disastrous if something happens to the car. You could end up making payments on a car you don’t even own anymore.
If you’re in the market for a new car and need financing, get multiple quotes. Look for the best combination of interest rate and loan term, and remember that the shorter the loan term is, the sooner you’ll own the car outright, which can save you lots of money in interest payments. Also, remember that just because a lender is willing to give you a loan doesn’t mean you should take it.
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