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Is an Auto Bubble About to Pop with Easy Loans?

With tight credit standards that followed the Great Recession, buying a new car was impossible for a lot of consumers. But new car sales are rising these days with the most recent 8% gain as credit standards loosened. But this happens as other economic indicators like unemployment rate shows to be dismal. Are easier auto loans then good news or bad news as they are seen to make another bubble pop?

Easier lending standards, longer repayment periods and the availability of auto leases are key drivers for the growth of new car sales, according to an Automotive News report. The average auto loan term at present is 65 months. New car loans that went to subprime borrowers or borrowers with credit scores of less than 700 increased to 27.4% in the second quarter of 2013. And the average credit score in the U.S., according to credit-reporting agency Experian, is 736 on VantageScore scale.

In 2012, about 14.2% of the population belonged to the lowest ranges of FICO scores. (FICO scores range from 300 to 850 while VantageScore is from 501 to 990.) But with more than a quarter of new car loans that went to people with poor credit, it seems that subprime borrowers are excessively represented in the most recent data of new car sales.

Loose credit standards help consumers repair their broken credit and start a good one again. But analysts are concerned about the similarity of today’s auto lending trends to the ones observed before the housing bubble popped.

Predictions for new car sales in 2013 are set to 15.5 million. To keep up with the demand, automakers double their production. Interest rates could rise and if they do, consumers might find new cars less affordable. This would obviously affect the demand. If demands decline, automakers will have to find ways, like offering discounts, to stimulate sales. If they keep on doing this, discounts will slash their profits which could impact the automotive industry and eventually the economy. A similar domino effect was last seen in 2008 when the crisis struck.

But even if interest rates go down, easy auto loans are not always a breath of fresh air to the car-buying public. Long auto loan terms and leases, which both make lower monthly payments, do get people behind the wheel, but they could also place buyers into something they couldn’t actually afford.

Repaying an auto loan in a longer period can make a new car more affordable but it could give you problems when you want to trade the car in. You would also end up paying more interest, making the purchase more costly than it should be.

If you’re looking to buy a new car, compare three or more auto loan quotes from different lenders before taking an offer. Keep the loan term short as much as possible. Experts say 48 months is the longest car buyers should go. Short loan terms may have bigger monthly payments but their benefits certainly outshine their very few disadvantages.

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