Credit easing makes U.S. auto loans easier to get

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A Hot Wheels diorama depicting an auto dealership.

Without car loans, this is the only kind of car many recession-starved consumers could afford. (Photo Credit: CC BY-ND/PMC 1stPix/Flickr)

Origination of U.S. auto loans in the first quarter was particularly lively, according to a new report by Experian Automotive. Easier auto lending terms – some of the easiest since the dawn of the recent recession – have opened the door for auto lenders to make more auto loans to customers now considered safe credit risks.

Subprime borrowers rewarded

In addition to the overall credit easing for safe borrowers, auto lenders also provided additional auto loans for borrowers with subprime credit scores. Experian noted that issuance of subprime auto loans increased by 11.4 percent in the quarter, compared with the previous year’s first quarter. This came in addition to lower interest rates and increased time given to repay, according to the Experian Automotive report. Experian Automotive is a satellite unit of Experian Plc, a leading global information services company.

Overall, the rate of late payments and vehicle repossessions by auto lenders was down in the first quarter, notes Experian.

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To live and die by auto loans

Credit easing can be a double-edged sword, some critics note. Relaxed terms open the door for more potential buyers, which in turn boosts auto sales. This is good for dealerships, manufacturers and the U.S. economy as a whole. However, aggressive lending leads to bank losses when borrowers cannot keep up with payments and eventually default, for whatever reason.

Such potential doom hasn’t soured credit industry experts on more auto loans, however.

“This thawing of the credit pipeline has been good for everyone, from consumers to lenders to automotive retailers,” said Melinda Zabritiski, Experian’s director of automotive credit.

The competition among auto lenders is a definite sign of market recovery, Zabritiski indicated.

Cars loans aren’t so explosive

Compared with mortgage and credit card loans, banks consider auto loans a safer product. Borrowers tend to make payments a priority, as possession of a vehicle is directly related to a person’s ability to get to work or apply for employment. Looking at the average credit score for auto loan customers who purchase new cars, Experian noted that the number dropped six points to 760. For point of comparison, a score of 680 or less qualifies as subprime. Used car buyers’ average credit score dropped four points in the first quarter to 659.

The size of auto loans during this period of credit easing also went up $589 to an average of $25,995 for new cars. The average auto loan for used cars went up $411 to $17,050.

Average monthly payments increased by only about $3 for both new and used cars, reports Automotive News. Average time required to repay auto loans went up an entire month from the year before, to 64 months for new cars and 59 for used. Interest rates went down 0.27 points, to an average of 4.56 percent for new car loans, and down 0.06 percent to 9.02 percent for used vehicles.


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