Can You Get an Auto Loan Today?
By James M. Flammang/autoMedia.com
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.
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 repossessions are at their highest level in 10 to 12 years, said Matthew Traylen, senior director of economics and 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.