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Consumers finding it easier to acquire a car loan

September 5, 2014

Prospective car buyers with poor credit scores can rejoice:  It's becoming easier to obtain an auto loan, according to Melinda Zabritski, senior director of automotive finance for Experian.

The global information firm revealed 53.8 percent of used car purchases and 85 percent of new car purchases were backed by a loan in the second quarter. Both those figures were up compared to the same period last year when 52.9 percent of used car purchases and 84.5 percent of new car purchases were financed.

It's getting easier to acquire a car loan.

“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,” Zabritski said.

But the rising percentage of loan-backed auto purchases isn't the only reason to take note. The size of monthly auto loan payments and total loan amounts is also ascending. From the second quarter of 2013 to the second quarter of 2014, the average used vehicle loan increased 1.9 percent to $18,258, while the average monthly payment jumped 1.1 percent to $355. Reuters reported those figures are all-time highs for the industry.

Consumers who are now in the market to buy a car should consider all of the costs that go along with making a major purchase, such as registration, yearly fuel costs and auto insurance premiums. Car buyers hoping to save money on insurance should check out SelectQuote Auto & Home, which offers comparison shopping from a dozen of the nation's blue-chip insurers.

The car industry by the numbers

While the car loan industry notched strong sales numbers throughout the summer, more people were also interested in leases. In the second quarter, 26 percent of car transactions stemmed from leases, an eight percent increase from 2008, according to LMC Automotive.

However, the Philadelphia Inquirer revealed additional leases could reduce used-car prices in a few years when all of those leases expire. In turn, that could make used cars a more valuable commodity and hurt new-car sales.

Lenders are also more comfortable extending the length of an auto loan. Thirty-two percent of auto loans were for 72 months or longer in the second quarter, up from 23 percent in 2008. Long-term car loans are generally viewed at in a negative light because unlike a home, a car loses value relatively quickly.

Greg McBride, chief financial officer at Bankrate.com, told the Inquirer dealers are starting to offer long-term loans for expensive cars, making monthly installments seem reasonable to consumers. But McBride said buyers should beware. Those loans tend to be front loaded with interest, making it harder for buyers to initially pay off principal and build equity for a trade-in.

Another reason lenders are more willing to make longer and larger loans is because vehicles are now more easily repossessed, according to McBride.

“You miss more than one payment, and it won't be in the driveway in the morning,” McBride said.

Sales to rise, then plummet

Adam Jonas, an analyst at Morgan Stanley, told the Inquirer current automotive trends could hurt manufacturers down the road.

“It could be a disaster later on,” Jonas said. “We're clearly robbing Peter to pay Paul.”

Jonas predicted car sales will soar through 2017 and peak at an annual sales rate of 18 million, but after that, sales would dip. He projected car sales will fall to 14 million in 2018, making it difficult for auto manufacturers to sustain profit levels, potentially leading to lost jobs and closed factories.