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Archive for December, 2013

Auto Loan Interest Rates Fall, U.S. Car Buyers Borrow More

The average auto loan interest rate dropped to 4.27 percent in the third quarter of 2013, the lowest since Experian Automotive started tracking in 2008.

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.

car loans

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.”



Buyers Feel Okay Paying More for a Car

U.S. car buyers are more comfortable about adding extra features to their new vehicles as auto loan interest rates drop and loan terms become longer.

The average transaction price in November is $30,634, according to auto pricing information source

There are also more buyers purchasing steeply priced, luxury vehicles. The sales of these vehicles rose to 11 percent this year, surpassing the entire industry. Competitive leasing programs largely contributed to that growth.

New-car buyers borrow more money this year as new vehicle prices continue to rise.

Experian Automotive recorded the highest average loan amount in six years. In the third quarter of this year, the average loan amount jumped to $26,719, up by $756 from the same quarter last year.


But despite taking out record auto loans, buyers were able to repay them with low monthly payments. The average monthly payment is $458, up by only $6.

Buyers are confident to pay more for their cars because auto loan interest rates are down. The average interest rate for auto loans reached an all-time low of 4.27 percent in the third quarter of 2013, Experian data shows.

Lenders are also willing to extend repayment periods to up to 84 months or seven years. The average loan term for a new car loan is now 65 months, a month longer than last year.

Over 40 percent of new auto loans distributed this year are five to six years long. And the number of buyers taking out auto loans that are up to seven years long went up to 19 percent from 16.4 percent in the same period in 2012.



Are 0% Auto Loans Worth It?

Who wouldn’t want to be able to snag an auto loan with no interest rate? It may seem impossible but believe it or not, they exist. But the question is, are they for real? Are they worth it? Let’s find out.

Only few people have perfect credit that qualifies for a no-interest car loan.
Point number one says that not many borrowers can get 0% auto financing because a lot of them today have blemished credit.

Zero-percent auto loans can be real, but only for those with excellent credit. They are also rare. There are some borrowers with stellar credit who still don’t qualify for an interest-free loan and get only a low interest rate. To see if you qualify check your credit first. But even if your score does not qualify, there’s no reason to feel bad. Here’s why:

The car price becomes non-negotiable in a way.
Let’s say you were able to find a dealer that can actually get you an interest-free auto loan. That’s great. But the downside of that is the dealer can no longer agree to a lower car price. Understand that they make money from the interest of the auto loan. Removing it from the picture gives them less profit, which makes them unwilling to slash the price.

But you can do something. If you know you’re qualified for zero-interest financing, make sure to negotiate the car price first before talking about financing.

With no interest, you can safely opt for a longer loan term.
In most cases, 0% auto loans get you into a short-term auto loan, usually lasting up to 4 years. Lenders believe that you need only a short time to finish repaying since monthly payments are smaller and there is no interest rate involved.

The monthly payment in an interest-free auto loan is certainly lower when compared with auto loans with interest rates. However, did you know that longer loan terms can reduce your monthly payment more? Let’s say you’re borrowing $20,000 with no interest. You agreed to repay for 4 years. Your monthly payment is $416. If you repay the loan for 6 years, your monthly payment will become $277.77. But it’s best to opt for a long loan term only when you have zero interest on your auto loan. Otherwise, keep your repayment period short, no matter how low the interest rate you have.

So, there’s no reason to feel frustrated if you’re not qualified for zero-interest financing. You can still get a low interest rate even if your credit is less than perfect. You just have to be diligent enough to shop around and compare different offers.



Dealer Markups on Car Loans Get More Attention

The New York Times recently reported about the case of a Hispanic car buyer named Pedro Lantigua who bought a new truck out of a trade in and agreed to a financing arranged by a dealer in Oklahoma City.

Aside from selling cars, dealers can also provide financing to their customers by arranging for them car loans through any lender in their network. They charge for this service by tacking the fee on the interest rate.

Not many car buyers know about this. But Lantigua knew the exact amount he was charged for the service—only after he filed a lawsuit against the dealership.

The 32-year old buyer agreed to pay $609 a month for six years or 72 months, but he did not know that a dealership fee of about $1,000 was included in his 12.6 percent interest rate.

Dealerships are not required to disclose how much they get from the extra charge they put on the interest rate. And consumer advocates and regulators like the Consumer Financial Protection Bureau (CFPB) are concerned about the discretion dealers have in marking up financing rates which leads to discriminatory lending.

cfpb gov

These observations have prompted consumer groups, regulators and even the government to look closely into the thriving auto lending business. (Auto loan originations are at the peak in the third quarter this year since 2007, reaching $97.4 billion, a report from the Federal Reserve Bank of New York shows. The market for securitized auto loans is also growing at the same time.)

Consumer advocates and the CFPB claim that non-white borrowers receive more expensive auto loans than white borrowers with same credit standings. Consumer groups say that dealer fees range from 2 to 2.5 percent on average which translates to hundreds or thousands of dollars of additional cost over the life of the loan.

Moreover, a study from the not-for-profit organization Center for Responsible Lending (CRL) in 2011 showed that dealers charge higher fees to car buyers with bad credit. Chris Kukla, the senior vice president, said that non-white borrowers are not proportionately represented in the subprime market.

The CRL has also observed that subprime borrowers also receive higher, marked-up interest rates which put them in a greater risk of getting behind their payments or losing their car.

The CFPB has suggested setting a flat fee to serve as the compensation for dealers’ service of arranging car loans for buyers. But the National Automobile Dealers Association (NADA) said it will only cost buyers more. NADA also contends that dealers charge not more than one percent interest for arranging financing.

The Justice Department has joined the investigations on whether the fees charged by dealers violate the Equal Credit Opportunities Act which forbids discriminatory lending against minorities.

But the CFPB does not have access to pieces of information like ethnicity and sex of individual borrowers to pinpoint where discrimination is taking place. Kukla also admitted that they cannot determine how much discrimination is happening because there is no available data.

Last October, a bipartisan group of senators sent the CFPB a letter to raise their concern over the bureau’s methodology in concluding that an issue such as discriminatory lending exists in the automotive industry. NADA shares the same concern.

Ally Bank, the source of Mr. Lantigua’s auto loan through the dealership in OKC, announced recently that the CFPB is investigating them after the bureau warned them about their failure to make sure that auto lending among their dealer partners is not tainted with discrimination.

The lender, which is one of the nation’s largest, said in an email that it has developed a dealer monitoring system to prevent discriminatory lending.

Despite arguments, NADA and consumer groups agree that consumers should shop around for auto loans before stepping into any dealership. And even if not foolproof, coming in with multiple offers in hand is the main defense consumers should put up, Kukla said.



Subprime Loans Strengthen Auto Sales

These days, dealerships sell to and finance car buyers with bad credit even if their scores are below 500. Buyers just need to have a good job, show proofs of income and put enough money down. This is very different from a couple of years back when most dealerships would not do business with them.

U.S. auto sales are en route to the best year in six years as they continue to be driven by people with subprime credit. Subprime borrowers accounted for over 27 percent of new auto loans in the first half of 2013, the highest recorded by Experian Automotive since 2007. Last year, it was just 25 percent and 18 percent back in 2009 when lenders drew back at the height of recession.

Subprime loans are funded by the investors who buy securitized subprime auto loans. According to Harris Trifon of Deutsche Bank, the issuance of bonds rose to $17.2 billion this year, totally surpassing the record in 2010 but still below the $20-billion peak in 2005.

Citigroup said that there are about 13 issuers this year that saw the asset-backed bond market lucrative as they make money for subprime car loans. Two of those are GM Financial (formerly AmeriCredit) and Exeter Finance which has issued $900 million worth of bonds backed by subprime auto loans.

Chrysler Group is one of those that have been experiencing the blessings of subprime auto loans. Last October, almost 60 percent of loans used to purchase Dodge vehicles had an annual percentage rate (APR) of above 4.2 percent industry average. Auto loans for Dodge vehicles have an average APR of 7.4 percent. More than 20 percent of loans have an APR of above ten percent. U.S. Dodge sales are 17 percent more this year until October than last year, reaching 43 consecutive months of increasing sales.

Credit-rating firm Standard & Poor’s said that subprime auto loan rates could reach 19 percent.

Regulators and some analysts are worried about subprime loans fueling auto sales. They see it as very similar with the housing bubble that stimulated the economic meltdown. But investors see differently and take it as an opportunity to raise interest rates when yields are low.



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