There is growing concern among senior executives in the auto and financing industry about long-term loans that some car companies are offering to entice buyers and boost sales.
Auto consumers have been increasingly attracted to long-term loans with low monthly payments. But industry executives are worried that customers will return to showrooms before the seven or eight-year terms of their loans have been completed and find that they owe more on the their vehicle than what it's worth as a used car.
NEW YORK, Sept 3 (Reuters) - A record number of US consumers are taking out loans to buy cars, especially those purchasing used vehicles, according to data released on Wednesday.
In the second quarter, 85 percent of new car purchases and 53.8 percent of used car purchases were financed, according to data from Experian Plc, an information provider.
That was up 0.5 percentage points and 0.9 percentage points, respectively from the same period in 2013.
Additionally, the size of auto loan amounts and monthly payments continued to rise, especially for used cars. Since the second quarter of 2013, the average used vehicle loan rose 1.9 percent to $18,258 and the average monthly payment on such vehicles rose 1.1 percent to $355, both all-time highs.
More and more consumers, especially those that are credit challenged, are turning to the used vehicle market as a viable option to purchase their next car, said Melinda Zabritski, senior director of automotive finance for Experian, in a statement.
Banks were the largest lenders to consumers buying used cars, financing 35.6 percent of all such purchases, or 0.8 percentage points less than the second quarter of last year.
In recent years banks have begun to focus more on the used car market as automakers in-house financing arms came to dominate the new car market. Such captive finance companies made more than one out of every two new car loans in the second quarter, according to Experian.
Regulators have become more concerned with banks willingness to lengthen terms on car loans, lend to borrowers with lower credit scores and give out loans that are larger than vehicles are worth.
In addition, the US Department of Justice has started investigating subprime auto loans that companies such as General Motors Cos auto financing arm and Santander Consumer Holdings USA Inc have made and securitized since 2007.
But at least in the second quarter, the share of both new car and used car loans that went to borrowers with subprime credit scores declined, according to Experian.
Lenders are still showing cautionary signs when lending to the subprime market and keeping their risk at manageable levels, Zabritski said.
Wells Fargo Co remained the largest US auto lender in the second quarter with a market share of 5.75 percent, down from 5.89 percent a year prior.
Capital One Financial Corp surged past JPMorgan Chase Co to become the third largest US auto lender after Ally Financial Inc. The McLean, Virginia-based banks share of the used car market rose from 3.77 percent to 4.20 percent. (Reporting by Peter Rudegeair; editing by Andrew Hay)
Easy credit and longer-term loans currently being offered at auto dealerships can make buying an expensive car alluring. Greg McBride, chief financial analyst at the Bankrate.com website, says consumers with poor credit shouldn’t bite.
Consumers tend to focus on the payment rather than the interest rate, which likely will be far higher than the below 3-percent rate now available to those with good credit.
They engage in the dangerous financial habit known as payment shopping, McBride says.
Here’s what he suggests instead.
â Buy a lower-priced car or a used car with a shorter payoff period. Paying it off will help you get a lower interest rate on your next car.
â Don’t be fooled by the payment on a loan that’s six years or longer. Look at the interest rate, which could be double or more what borrowers with good credit can get. It will take years for you to build any equity in your car.
â Don’t buy a car until you pay down other debts and improve your credit rating.
â Try to save for a bigger down payment. This could get you a lower interest rate.
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There are multiple ways one can go about financing a car, so it figures that there is not one set minimum amount one has to pay when it comes to vehicle financing. However there is a consensus.The General Amount for Car Financing
If you visit your local bank for a car loan, the standard response youll likely hear back is they need you to need at least $5,000 before they let you take out a loan. Its set so that the bank can make a decent return on interest on the loan for you to be worth their while.
But what if you dont want to buy a $5,000+ car? Well there are other smaller loans one can take out, however the tradeoff often is that in return for a loan on a smaller sum of money, the interest rate is higher. Basically, like you thought, everyone is out for their pound of flesh.When Your Poor Credit Score Is a Factor
There are other options besides banks or credit unions when it comes to lenders, however youll run into one general trend. For loans less than $5,000 dollars, the interest rate will rise to make up for the lenders lost profit. And thats before you add factors like the rising cost of taking out a bad credit auto loan versus taking out one with a good credit score.
For example that one point something percent auto loan your credit union puts on blast isnt going to do many Americans today much good if they dont qualify. And in fact people who dont qualify at a bank or credit union can quickly see rates pulling past 10-15% due to poor credit. Meanwhile, people trying to finance a car through dealers who work with bad credit can be looking at more than 20% or more financing.
So, even though you only intend to finance a car from a buy here pay here that might have a street value of $2,000, youll quickly make up the difference in interest. Or possibly more than that after repairs factor in.Setting Your Expectations and How We Can Help
Realistically, if you have no money in pocket and need to finance a car, you can expect to spend over $5,000 for the best rate, or be prepared to pay more to spend less. When it comes to bad credit, finding a lender who will work with your credit trouble can be difficult, but here at Auto Credit Express we can help. We been helping people overcome their credit challenges for over twenty years. If you need help finding a dealer that will work with you to find the absolute minimum necessary to get a car, even if you have bad credit, let us help. Just fill out our hassle free no obligation auto loan application today!