Subprime conditions: Bad credit car buyers are getting the squeeze on car loans

Having trouble getting a car loan? Don’t worry – everyone hits a rough patch. But this time it may have less to do with that late payment and more to do with the automotive lending business. For the second consecutive quarter, lending institutions have tightened available credit – a seemingly cautious move that means car buyers with a “subprime” credit rating may be left taking the bus – or more likely paying a higher rate for their loan.

Subprime is the designation lenders use to define customers who have less-than ideal credit; usually a FICO score of 660 will earn you membership in the club, as will a foreclosure or a bankruptcy. Back in 2007, subprime mortgage loans made headlines for the part they played in the Great Recession.

Here and now in 2017, however, banks are looking at the auto market through a slightly different lens. According to Experian data, “the share of loans extended to borrowers with subprime and deep subprime credit dropped from 22.82% in the year-ago quarter to 21.86%.”

TransUnion, in their Q2 Industry Insights Report, also found Q2 2017 subprime auto lending down slightly compared to 2016. And according to Auto Finance news reports, in April, U.S. Bank began to focus more on higher credit loans, and moved away from making 84-month loan offers.

That may not seem notable; according to experts the decline shows a tightening of underwriting guidelines, driven by delinquencies and issues with the affordability of vehicles – all of which makes it more difficult to score that loan or get a decent interest rate.

The decline follows a trend of cautious lending found in a recent survey sponsored by the National Automotive Finance Association and American Financial Services Association. The survey queried 54 mostly large-scale lenders with a combined $31 billion in subprime business, and found that loans declined around 14 percent in total dollar value, while credit scores increased slightly for new and used vehicle sales.

The reason? Experts point to that increase in delinquencies, and a decline in profitability as possible culprits – both of which might point to the emerging issue around vehicle affordability. In essence, higher-priced vehicles mean bigger loans…and tough monthly payments. Add to this a healthy dose of economic uncertainty caused by a fragile auto market, and car buyers on the fringe of good credit may have trouble finding the loan that gets them into the right car.

If that’s you, consider these three tips – they may improve your chances of getting a decent loan:

1. Buy what you can afford: In 2017, the average monthly car payment is around $470, and the average car loan is over $30,000 with a term that stretches out over five years. If your credit’s not great, be realistic about your financial situation and find a car to match it.

2. Save up for a down payment: Putting a little money down may help you qualify. In fact, just $1,000 or 10 percent may be required.

3. Shop your loan before visiting the dealership: Try to get the best rate by shopping for a loan online, prior to visiting the dealership. That may help give you more affordable options. 

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