Wells Fargo & Co. expects to increase its auto lending again. In mid-2017, Wells Fargo decided to reduce car financing and tighten its underwriting standards. In February 2018, the firm said it intended to finish consolidating its regional car loan centers by April, and that lending would expand within two quarters, reported Bloomberg.
In April, Wells Fargo was ordered to pay federal regulators $1 billion in fines – in part for selling auto insurance to its auto loan customers that was not needed. The company began reimbursing affected customers last year.
The decision by Wells Fargo is set against a challenging auto loan environment as lenders have been more conservative with auto loans lately. For lenders in a $1.2 trillion U.S. auto loan market, they face a landscape with falling vehicle resale prices, making it difficult for them to soften losses from repossessing cars when borrowers default.
Lenders have also lengthened borrowing terms up to eight years (96 months), according to American Banker. Just 10 years ago, the average auto loan maturity was five years. With these expanded terms comes an increasing probability that defaults will rise and loan recoveries will fall. Currently, auto loan subprime borrower defaults are higher than in 2007, and delinquent auto loan balances have been on the rise since 2012. Lenders have reacted by underwriting fewer subprime loans, resulting in a five-year low in the first quarter, according to CBS News.
Furthermore, in the first quarter of 2018, with interest rates rising, the U.S. auto industry channeled more incentive money to subsidize low-interest loans and less toward leases, according to Forbes. However, these low-interest loans are typically reserved for applicants with strong credit.
So what should consumers do in a market like this to (responsibly) obtain an auto loan? Here are some experts’ tips.
Manage your credit: Ideally, a buyer will be ready with a decent-sized down payment. But credit and income also help determine a loan approval. Checking one’s credit report (it can be done for free through AnnualCreditReport.com) before loan shopping is a good idea as healthy credit scores bring lower interest rates and ultimately a smaller vehicle payment.
Set a budget: Have a clear idea of how much will be spent – including a down payment and monthly payments – before vehicle shopping. Remember, the larger the down payment, the smaller the loan (and subsequent monthly payments).
Shop around for loans: Keep in mind auto loans don’t have to come from the dealership. Alternatives include banks, credit unions, online lenders, or P2P lending sources. This enables shoppers to obtain a picture of the current market and to be armed with some bargaining power.