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It’s Tough to Get a Car Loan

Looking for some good news in the current economic mess? Well, the national average price of a gallon of regular unleaded has dropped to “only” $3.480! Of course, if you remember gas well below $2.50 per gallon just three years ago, that news can seem less than exciting. So maybe you’re thinking of parking your giant, gas-guzzling SUV and buying something more fuel efficient. Unfortunately, thanks to the credit crunch, buying a car these days is no easy task.

While all the recent news has been primarily concerned with the crisis in residential mortgage backed securities, auto loans are in trouble, too. The percentage of auto loans considered delinquent (payments more than 60 days past due) jumped 11.5% in the second quarter of 2008 from the same quarter last year. That’s an even bigger problem when you consider that, according to Peter Turek, automotive VP in TransUnion’s financial services group, the average auto debt has also increased about 2% ($12,869 in the second quarter, compared to $12,630 in the second quarter of 2007).

This is just another illustration of the ripple effect that bad mortgages have caused throughout the rest of the economy. Slumping housing prices means homeowners have less equity in their homes. Without access to that equity to finance their car purchases, more people have taken out car loans. But as more people are trying to buy fuel-efficient cars, Turek predicts that both the size of the average car loan and the rate of delinquencies will rise.

So what does this mean when you try to finance your new car? Well, there is still enough consumer credit out there to get an auto loan, provided that you have a good credit score. Lenders across the board are instituting much stricter standards for loans – spreads have widened, and you’re probably going to have to pay more to get that credit… assuming you get approved in the first place. Lending was still going on – and was still expanding through September – according to the Federal Reserve’s Assets and Liabilities of Commercial Banks. But it was expanding at a slower rate.

The auto loan industry in particular has been hit hard. Losses on bad auto loans doubled in 2007. To cut their losses, lenders are requiring higher credit scores and larger down payments, demanding faster repayment on the loans, and charging higher interest rates. You’re probably going to be looking at an interest rate between 6.25% and 7.25%, depending on your credit score.

The government’s trying to do something to help out in this area. The bailout plan includes provisions authorizing the Treasury to buy distressed non-mortgage loans, including auto loans. This could relieve banks of the bad loans that have been sitting on their balance sheets and preventing them from making further loans.

Still, until the credit markets have been reassured, you’re going to have to pay a premium for loans of any kind. While a more fuel efficient car may save you money at the pump, higher interest rates on your car loan is an important cost to take into account when making a decision on buying that new hybrid.

– Vanessa Durante

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