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U.S. subprime borrowers are staying away in larger numbers from buying new cars, according to research company J.D. Power, via Bloomberg. The shift is likely because of increasing interest rates and the higher cost for a new vehicle. The first two months of 2018 showed a 9 percent decrease in new car sales to those in the subprime lending category.
Why It’s Hard for Subprime Borrowers to Get into a New Car
The recession from 10 years ago was hard on a lot of U.S. residents. Some Americans who were used to buying new cars occasionally found their investments decreasing at a rapid rate and many found themselves out of work often through no fault of their own. That loss of income and ability to meet their bills led to lower credit scores.
While lenders were lenient in the first few years following the country’s recovery from the recession, lending companies began creating tougher restrictions in the past two years.
“Subprime losses increased maybe to pre-recession levels a year or so ago,” David Goff, vice president of marketing at Westlake Financial Services, told Bloomberg.
Because of those losses, lenders felt compelled to increase the requirements for subprime borrowers. That has caused some of those borrowers to stay away and opt for a pre-owned model instead.
Westlake Financial Services, for instance, has had its level of subprime loans drop from 75 percent of its portfolio five years ago to 55 percent currently.
What Can Subprime Borrowers Do to Increase Their Odds of Landing a Loan?
Simple steps like paying bills on time and cutting down on debt can gradually increase credit scores. But what happens if they need a car before those numbers come up? There are still some things they can do.
They should try to have some cash saved up in addition to having a trade-in vehicle. If they don’t have a trade-in vehicle to work with, cash will be necessary. The greater the down payment they have saved up, the more comfortable lenders will feel about taking a gamble on them.
Those who are worried about being refused for loans and don’t want to buy a new car anyway may want to consider a personal loan. If you don’t have to travel far for work and you’re hoping to get an older car that might not qualify for an auto loan, a personal loan might be a potential option for you.
Borrowers, even subprime borrowers, can get smaller loans, although the interest rate may be high. If they handle that loan responsibly, they might be able to land a better loan when it comes time to replace that car.
Author: Mike Brown
In his role at LendEDU, Mike uses data, usually from surveys and publicly-available resources, to identify emerging personal finance trends and tell unique stories. Mike’s work, featured in major outlets like The Wall Street Journal and The Washington Post, provides consumers with a personal finance measuring stick and can help them make informed finance decisions.