Not so long ago, buying a car on credit was stress-free. Hardly anyone had to go without wheels. Through the 1990s and into the 21st century, dealers were selling cars for little (or even nothing) down, and lengthening loan terms to six and seven years, to keep monthly payments low.
Those days are gone. As the nation surged into financial crisis in late 2008, lending agencies tightened the purse strings-and knotted them tautly. Lenders have been limiting loans to shoppers with high credit scores, leaving subprime and near-prime folks out in the cold.
It's Not You, It's Me.
"Financing sources are tending to be more restrictive about who they'll lend to, said Jack Tracey, executive director of the National Automotive Finance Association. These limits have "little to do with the individual borrower," Tracey added. They're more a reaction to the overall financial situation.
CNW Marketing Research found that subprime loan approvals have fallen sharply. In 2007, two-thirds were approved. In April 2008, the figure was 47 percent. By September, fewer than 23 percent of subprime applications were approved, dropping near 14 percent in October. Dealers also had to try nearly twice as many lenders, to get an approval.
Art Spinella, CNW's president, reports "more cash buyers than we've seen in years." Many are selling household assets, especially "discretionary purchases," to buy vehicles outright.
If paying cash isn't an option, what might you do to be loan-worthy in today's volatile, rapidly changing economy?
Keeping Score.
Credit scores are crucial, though they don't reflect the full picture of a person's financial stability. They focus solely on factors that can be measured. Lenders rely totally on what are called FICO scores, which range from 300 to 850. Prime customers-the ones who can still get loans at reasonable rates-rank somewhere above 700 (depending on the lender). Near-prime hovers around the mid- to upper-600s. Scores below 620 or so send the applicant into subprime territory. If those latter folks are able to get loans at all, they can expect to make a down payment of at least 20 percent.
"Most people who don't have good scores have missed payments," said Maxine Sweet, vice-president of public education at Experian. Worse yet are those who've missed payments often, though a late payment isn't necessarily as much of a demerit. Scoring companies consider "utilization, which shows "how much you do owe, compared to what you could owe." Sweet explains that "having a credit card account is one of the most positive" factors, because the amount paid each month is up to you. "It takes more self-management."
Consumers can obtain copies of their credit report from several online sources, including freecreditreport.com. Information on improving your credit score may be found at nationalscoreindex.com (sponsored by Experian).
Credit Unions, Small Banks.
Some car-seekers have options, such as credit unions and local banks. "Credit unions are probably a little bit less restrictive as a group," Tracey said. "They tend to accommodate their members." At least one-fifth of auto loans are obtained through credit unions. Also better are "smaller local banks where customers have relationships." Tracey recommends "going back to a lender you've previously dealt with, who might treat you as an ongoing customer."
Shoppers who lack such connections face trouble. At a minimum, they'll have to make a bigger down payment than in the past, and accept a shorter-term loan. Until recently, loans with 84-month terms were common. Lenders coveted new business and accepted borrowers with imperfect credit records to get it. Now, a similar loan may have a term of 60 months, or even 48 months.
Loan-to-Value Ratios.
No one can predict how long this limited availability of credit will last. Lenders are reluctant partly because of generalized fear about the economy, but also for tangible reasons. Defaults and reposessions are at their highest level in 10 to 12 years, said Matthew Traylen, senior director of economics & portfolio services at Automotive Lease Guide (ALG). Speaking at the National Remarketing Conference in October 2008, Traylen noted that loan defaults weren't limited to low-end models, but included a "lot of luxuries."
High loan-to-value ratios are "not uncommon," Traylen explained. When the amount due on a loan is higher than the vehicle's value, the likelihood of default increases.
In another Remarketing session, Jie Du, director of scientific programming and modeling, remarketing analytics, and revenue management for J.D. Power and Associates, explained that the average finance term in autumn 2008 was 62 months. The average Annual Percentage Rate (APR) reached 11 percent. Loans with 60- and 72-month terms dominated. For used cars, the average monthly payment was $365-about 1.9 percent of the total price. The average used-car buyer has been making a $2,700 down payment, which is 13 percent of average vehicle cost.
Lenders are "having a hard time qualifying buyers," said Mark Matthews, director of used vehicle activities for GM. "Financial institutions are hoarding cash, not loaning it." Many who avidly sought customers a year ago are now looking for ways to reject applicants. "Free-wheeling days are over," added Danny Papakalos, used car director for AutoNation.
GMAC, the financing arm of General Motors, announced in fall 2008 that they would only make car loans to applications with FICO scores above 700-clearly in prime territory. Norm Olson, national sales operations manager for Toyota Certified vehicles, says, "We have made some adjustments in credit scoring," but not as drastically as GM.
Neither a Borrower Nor a Lender Be.
Dealers tell customers, "We've got banks that will give credit," says Ricky Beggs, managing editor of the Black Book (a prominent used-vehicle valuation guide). But there's a catch. They're "not advancing as much." Shoppers who are "upside-down," owing several thousand dollars on their current vehicle, "can forget it."
As a general rule, obtaining financing from an outside source-before visiting a dealership-is the prudent course. Today, that simply doesn't work for everyone. Even so, dealers around the country have been advertising that loans are available. After all, they still want to sell you a car, and are eager to find a way to do so.
"Most people are just not able to pay cash for a vehicle," GM's Matthews noted. "They have to borrow." And they face a difficult task, trying to convince reluctant lender representatives of their dependability. On the other hand, if your trade-in is paid for, and/or you have ample cash down (and good credit), loans are still out there.
