With lower interest rates, American car buyers borrowed more money to buy a car. The average loan amount rose to $26,719 from $25,963 in the same period last year. But they did so with lower monthly payment. The average this year went up only $6 to $458.
Consumers also took more time repaying their auto loans. Nineteen percent of new car loans were six years or 72 months long, higher than 16.4 percent last year. This explains why buyers managed to keep their monthly payments low even if they borrowed larger amounts.
Experian Automotive’s senior director of automotive credit Melinda Zabritski said, “The third quarter of 2013 proved to be a good time to purchase a new vehicle, particularly for consumers who buy based on their monthly payments.”
“With loan rates at historic lows, car shoppers were able to take advantage and get a little more vehicle for their monthly payment… shoppers perceive they are getting better deals and manufacturers and dealers are boosting sales,” she added.
U.S. car sales for 2013 look great. The industry experienced a yearly U.S sales pace of up to 16.41 million vehicles, the best since February 2007 and exceeding the expected rate of 15.75 million.
Experian data suggests that loose credit standards, automaker discounts and the popularity of large pickup trucks encouraged car buyers to borrow more money for a car, which contributed to auto sales increase.
However, many auto analysts are worried about the growth of subprime auto lending and how it compares to the housing bubble, which eventually led to the Great Recession in 2008.
According to Experian, 26.04 percent of new-auto loans went to subprime borrowers or people with bad credit, up from 24.84 percent last year. Among used-car buyers, 54.95 percent have subprime credit, higher than 54.43 percent in 2012.
Moreover, the average credit score for new auto loans went down two points to 753, while the average score for used auto loans remained flat at 688.
The Federal Reserve Bank of New York said August that subprime auto lending is reaching prerecession levels. Over 27 percent of new auto loans are subprime in the first half of the year, earlier data from Experian showed. It was 18 percent in 2009.
But Zabritski said, “Subprime lending is still growing slightly, but is still well below prerecession levels in the highest risk segments, and its growth rate has slowed considerably. It seems as though lenders are approaching their ceiling for how much risk they are willing to take.”