Finding car deals is easy but lenders are tightening their terms


New cars are more available this spring, and manufacturers have also started offering deals to entice buyers.

But at the same time, lenders are tightening car loan terms as they deal with the increasing number of delinquencies. This has made it difficult for some people to get affordable loans.

Access to auto loans for both new and used cars was generally worse in January than in December and declined year over year, according to Cox Automotive Service DealerTrack, which measures credit based on factors such as loan approval, terms and down payments. Tracks availability. Its impact was seen on banks, credit unions and dealerships.

“We're seeing a tightening of credit access across all channels,” said Sean Tucker, senior editor at Kelley Blue Book, Cox's car research and sales website.

Subprime borrowers in particular – consumers with the lowest credit scores – may face challenges finding financing, Mr. Tucker said. The share of subprime new car loans has fallen to about 6 percent, about half of what it was before the pandemic.

Borrowers with strong credit are especially attractive to lenders. The average credit score for people buying a new car on a loan or lease rose to 743 at the end of 2023, from 739 a year earlier, according to fourth-quarter data from Experian Automotive, a company that tracks car financing. For used cars, the average score increased from 681 to 684. (Experian's report uses the VantageScore 3.0 score, which ranges from 300 to 850; scores of 661 and above generally qualify for favorable terms.)

People are defaulting on car loans (and credit cards) at higher rates than before the pandemic, according to a February report from the Federal Reserve Bank of New York on household loans and credit in the fourth quarter of 2023.

“This suggests increasing financial stress, particularly among young and low-income households,” Wilbert Van der Klauw, an economic research adviser at the New York Fed, said in a statement about the findings.

Delinquency rates for all types of consumer loans declined during 2020 and 2021, at the depth of the pandemic, but as stimulus aid dampened savings and the end of moratoriums on mortgage and student loan payments, the Fed reports. Increasing.

Auto loans secured in 2022 and 2023 have far more problems than earlier loans, “perhaps because buyers faced higher car prices during those years and may have higher and higher interest rates on them.” “Borrowing rates may have been pressured up,” New York Fed researchers said in a blog post. Interest rates on car loans are influenced by the Federal Reserve's benchmark rate, and have increased during the Fed's campaign against high inflation.

According to Experian, both car prices and average loan amounts have begun to decline over the past year, but monthly payments have not, in part due to higher interest rates on auto loans. The average monthly loan payment for a new vehicle was $738 at the end of last year, up from $720 in 2022. The average monthly loan payment for a used vehicle was $532, up slightly from $530.

The average interest rate on loans for a new car was 7.18 percent at the end of 2023, up from 6.08 percent in 2022, Experian said.

Interest rates can affect the down payment. Heading into 2020, a 10 percent down payment was common. But according to Cox Automotive, it's been rising and has approached 15 percent in recent months – perhaps because buyers are trying to lower their monthly payments.

With abundant inventory of new cars, dealers have started offering incentives like cash-back rebates. Mr. Tucker said dealers typically prefer a 60-day supply of cars, but the average now is about 80 days. This means manufacturers can offer deals to help get vehicles off sales lots. “The supply is excellent,” he said, in contrast to the decline in prices during the pandemic.

Although used-car buyers may find that prices have stabilized, “they're still quite high,” said Benjamin Preston, auto writer for Consumer Reports.

If you don't need to buy a car right away, there could be an argument for waiting a bit. Mr. Tucker said carmakers who emphasized more profitable, higher-end models with luxury features during the pandemic are expected to begin producing more affordable cars in the coming months. And the Fed has signaled it may cut rates sometime this year, making loans more affordable.

Lower interest rates can be found now — if you have top-tier credit and can manage a shorter loan term, which means higher monthly payments, said Rod Griffin, senior director of public education and advocacy at Experian. (Longer-term loans – those with a term of six to seven years – had average interest rates of about 9 percent, Experian found.)

Recently, Honda was offering 2.9 percent financing on Honda CR-Vs with a tenure of 36 months; Subaru offers 1.9 percent on Outbacks with a 48-month loan.

Here are some questions and answers about car shopping:

Prepare early, Mr. Griffin advised – at least six months before you plan to buy. Check your free credit report and, ideally, your credit score. (Before paying for a score, ask your credit card company or lender. Many provide these for free to their customers). Take any steps to improve your profile – like paying bills on time.

Then, shop for your loan and your car separately, Mr. Tucker said. Get pre-approval from your bank or credit union, and take that offer with you to the dealer to see if they can beat it.

Yes, but it has not had any effect yet. The Federal Trade Commission last year finalized its CARS rule to combat auto retail scams, aimed at protecting car buyers from hidden fees and bait-and-switch pricing tactics. The Commission said the rule would make it easier to make purchases based on a car's actual value and would save buyers an estimated $3.4 billion per year.

The rule was scheduled to begin in late July, but the agency postponed it pending the outcome of a legal challenge by industry groups. The National Automobile Dealers Association, one of the rule's opponents, said in a statement, “We believe this rule is unnecessary, redundant, confusing and will unnecessarily lengthen the car sales process for consumers. “

The Federal Trade Commission recommends contacting your lender immediately. If you can continue to make late payments, some lenders may agree to work with you.

If you don't make payments, the lender can repossess your car. There may be a difference between what your lender gets from selling the car and how much you still owe, plus fees associated with repossession. Also, having the vehicle repossessed by the lender may make it harder and more expensive to get a loan in the future. Know your rights, which vary by state. Contact your state Attorney General's office.


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