As credit scores for new auto loans hit record highs, lenders have also tightened their standards and are lending less based on purchased vehicle values.
This is good news for the auto lending industry because narrower credit standards are “starting to pay off,” according to Standard & Poor’s Global Ratings. For consumers, it’s not very good news. They’ll likely be receiving less money for trade-ins and end up paying more on down payments.
FICO Credit Scores Rise
The S&P report also included trends affecting the auto finance industry such as falling prices on used cars and possible upticks in auto loan delinquencies and bad loan charge-offs. FICO scores have also risen to 748, as the average figure for asset-backed securities of prime-risk auto loans last year, a record. In the fourth quarter of 2017, the median score of 707 across all loans represented a figure last reached in 2011, Bloomberg reported.
For securitized subprime loans, the average score was 578, the highest since 2009. Remember, FICO credit scores range from 300 to 850. A score of 620 and below is generally defined as subprime.
What do all these numbers mean for consumers? As some borrowers lag behind in paying bills, lenders are starting to raise standards. Tightening occurred in the fourth quarter of 2017 as auto loan delinquencies reached 2.33 percent, lower than the 2.36 percent in the previous quarter, but continuing a rising trend since 2013, according to LendEDU.
In other words, car buyers should be ready to face challenges with auto loans.
Preparing to Get an Auto Loan
For auto buyers with a low credit score, they shouldn’t panic as loan opportunities are still available. However, buyers might get higher loan interest rates. According to experts, here are some tips for obtaining a good loan:
- Purchase a car you can afford: Last year, $470 was the average monthly cost for a car payment, and the average automobile loan was $30,000 (over a five-year term). Be careful not to take on too much debt.
- Save money for the down payment: It can be easier to qualify if you have money down – aim for 10 percent.
- Shop around for the best loan: Shopping online for an auto loan might help you find a better rate. Look for different options to create a budget and manage expectations before making this big purchase. All of this should be done before visiting car dealerships.
Tighter access to credit doesn’t necessarily have to be a bad thing for consumers. But it’s important to know what your options are so you can obtain the financing you need.