The Washington Post recently discussed a new phenomenon occurring throughout the auto loan world—a boost in auto loans for all borrowers, regardless of credit worthiness.
Experts believe that low rates and overall score improvement is bringing auto loan borrowers out of the woodwork, providing an assortment of opportunities for lenders.
However, what seems to be recently tickling some loan broker’s fancy is the subprime borrower, or borrowers with credit scores of 679 or lower. Since financial institutions can charge higher interest rates for this type of loan, lenders seem to be actually mining for these loan types. The Post says that a borrower with a credit score below 550 could receive a 12.9% rate for a new auto loan (as compared to 3.2% for a borrower with the tip top credit score) generating far more interest than a borrower bringing “A” paper.
Simultaneously occurring is the lowered amount of debt both consumers and financial institutions are carrying, which makes subprime loans less risky—consumers are more likely to pay now than in recent years, regardless of credit. According to The Post (through data gleaned from Experian), just 0.57% of auto loans were 60 days delinquent in the first quarter of this year, compared with 0.78% in the first quarter of 2009.
A spokesman from General Motors Company says that financial institutions should not be leery of the subprime borrower. “The recession created an awful lot of new subprime buyers, but it doesn’t mean they’re a bad credit risk,” spokesman Jim Cain said.
Lacey Plache, chief economist for the auto information site Edmunds.com explains why providing a loan to subprime borrowers is different than it was during pre-recessionary times. “Consumer spending is still very conservative. People aren’t going hog wild like they did before the recession.”
Credit Unions Weigh In On Auto Loan Environment
Credit unions across the country are feeling the auto loan buying love as many report seeing a spike in overall auto loan demand.
For example, Highmark Federal Credit Union ($87 million, Rapid City, SD) reports an increase across the board ranging from new and used purchases to refinances.
“We are seeing an increase in both new and used auto loan volume - refinances as well as purchases,” reports VP of Lending, Terri Larson.
Larson explains that as a credit union, the underwriting criteria is and always has been as consumer friendly as possible. “We look at the entire financial profile of a borrower, not just a credit score. Other institutions may be loosening their guidelines once again, but from the credit union world, our business model will always support helping as many of our members as possible with affordable financing and excellent service!”
“I attribute our increase in loan volume due to the perception that the economy is improving and due to the fact that there are exceptionally low interest rates available to those that qualify,” Larson continues.
“Although Dealer/Manufacturer Incentives are tightening because the demand is increasing, financial institutions with a lot of liquidity are looking to get those dollars loaned out, which means lenders are sweetening the pot by offering historically low rates to compete with each other,” she says. “Would-be buyers that have been on the sidelines waiting for the economy to stabilize are more accepting of the current economic conditions and the attractive rate environment is enticing these folks to purchase sooner than later.”
For Family Community Credit Union ($31 million, Burton, MI), individual member situations are taken into account. “We fully underwrite the loan, we look at their ability to pay, the likelihood to get it paid back, whether they have bruised credit,” said Elizabeth Warden, VP/Lending and Marketing when she discussed the issue with a local Michigan publication.
“I would say we do lend to people with bruised credit more readily for an auto loan than an unsecured loan,” she says. “An unsecured loan is a loan that is based on your signature, and there is no collateral involved, no lien placed on any piece of collateral. There is no security.” Family Community Credit Union reports a 12 to 15% increase in auto loans for the past two years.
How the Economy Has Shaped Today’s Auto Loan Borrower
Larson says that tough economic conditions over the past five years have had an impact on both borrowers and savers financially. “Initially, I think most people figured that the recession wouldn’t last as long as it has so they may not have been quick enough to adjust their lifestyle and spending habits to prepare for financial emergencies,” she says.
“As time has passed however, I think consumers are doing a better job managing their finances,” Larson continues. “Most appear to be doing a little more planning when it comes to making a larger purchase and perhaps a little less in terms of spontaneous spending.”
She says that consumers are definitely doing a better job researching larger purchases - particularly when it comes to purchasing a car. “They are doing their homework on reliability of the cars they are interested in, finding out what the car’s value is before making an offer to purchase so they don’t overpay, and they are learning the value of protecting their credit and their assets by purchasing an extended warranty to cover repairs, GAP protection to cover any negative equity they may experience during the life of the loan in the event the car is totaled, and credit insurance just in case the unexpected happens.”
Larson says that credit union members have a leg up when it comes to borrowing from their credit union. “As a credit union member, there is a lot more value in belonging than just taking out a loan. We take advantage of every opportunity we get to provide sound financial advice to our membership on all things ‘financial’ whether it is buying a home, buying a car, saving for retirement, or anything else that is important to them.”
She explains that whenever she is presented with a member who is experiencing a financial hardship, the credit union will offer assistance on putting together a budget, how to consolidate debt to lower their payments and/or provide the option of deferring a loan payment so they can recover and protect their credit rating. “Members that come to us with previous credit challenges are counseled on steps they can take to improve their overall financial position and credit rating in order to qualify for more favorable financing terms,” Larson says.
Whether you are a credit union member or employee, check out Credit Unions Online Auto Loan Calculator to estimate how much your monthly payment could be, then find a credit union and get behind a new set of wheels!