Credit crunch puts brakes on easy car loans
Posted on Sunday, October 5, 2008
The era of easy auto loans has come skidding to a halt.
Mortgages were among the first consumer products to be hit by the credit-market freeze. Now car loans and leases are drying up as dealers, auto-finance companies and other lenders are having trouble finding money to lend to car buyers. The upshot: Those with less-than-stellar credit are getting shut out of loans, and even some so-called prime borrowers are having trouble getting financing.
“You have to just about be walking on water to get financed,” said Mike Jackson, chief executive of AutoNation Inc., the largest U. S. chain of dealerships. He added that the subprime market is “basically almost closed,” but “even with our prime customers, banks are looking for a reason to say no.” It remains to be seen how long it will be before credit returns to some sense of normalcy, or if a new era of tighter credit has begun.
AutoNation dealerships sold 532, 862 light-duty cars and trucks last year, and this year, amid the credit crunch, that number could fall by as much as 20 percent, Jackson said.
For shoppers with good credit, financing is still usually available, especially among healthier foreign automakers like Toyota Motor Corp. and luxury companies like BMW AG. But overall, financial institutions have become less likely to lend.
Credit unions and so-called captive-finance companies — the lending arms of major automakers — are likely to offer the best chance of getting a loan. Paying down outstanding debt to boost credit scores also could help. And car shoppers should consider turning to the used-vehicle market if they can’t get financed, or at least settle for a less-expensive car.
These days, though, even the used-car market can be hard to negotiate. Laura Ryan-Day of Austin, Texas, said she was rejected four times by Wells Fargo & Co. for a loan on a 2006 Honda Element, even though she has no creditcard debt and rents her home, and her credit score is above the national average. Her income as a psychotherapist has been consistently high, she said, and she earned an additional $ 30, 000 last year after she started her own practice.
After she found the car, Ryan-Day thought getting a $ 13, 500 loan through Wells Fargo, where she has her checking, savings and two credit-card accounts, would be a snap.
“I’ve had friends take out loans before for a bigger amount with much less hassle,” said Ryan-Day, 32.
She said Wells Fargo’s initial denial stemmed from confusion over her tax returns, which the bank said hadn’t been filed. After she found the forms and resubmitted, the bank offered a series of objections to her income and expenses related to her new practice, she said.
Then, nearly two weeks after first applying for the loan, she received a call from Wells Fargo Financial, a subprime unit of the institution. She was quickly approved for a 12. 24 percent APR loan for $ 14, 500, after taxes and fees.
“I really needed the car,” she said. “What else was I going to do ?” “We work hard to ensure the best pricing for our customers while managing risk for the company,” a Wells Fargo spokesman said. “Beyond that, we do not comment on customer relationships because they are confidential.” As of Sept. 20, about 64 percent of auto-loan applications were getting approved, down from 83 percent during the same period last year, according to CNW Marketing Research Inc., a research firm based in Bandon, Ore. Subprimeapplication approvals suffered a dramatic drop, falling to about 23 percent from 67 percent a year ago, but even near-prime and prime approvals fell somewhat.
When they do get a loan, car shoppers are likely to get less cash from lenders, requiring them to put more money down to borrow — sometimes 10 percent to 20 percent of a car’s value. The average down payment on a roughly five-year auto loan in August was $ 3, 067, up from $ 2, 435 a year earlier, according to Edmunds. com, an auto-research firm. It’s only the second time the figure has exceeded $ 3, 000 in nearly four years.
J. P. Morgan Chase & Co. ’s Chase Auto Finance unit is asking buyers for higher down payments and more documentation for loans, a spokesman said. Other standards implemented in the past year or so: no subprime loans longer than 72 months and capping all new-vehicle loans at 84 months.
Americredit Corp., a big subprime auto lender, expected to originate about $ 10 billion in loans between July 2007 and June 2008, but fell short. It now expects to originate about $ 3 billion for the year ending in June 2009, a spokesman said. The firm recently reached a financing deal with Wachovia Corp. for auto-asset-backed security notes it expects to issue in the future. Customers can expect interest rates on Americredit car loans to be 2 percentage points higher than a year ago, according to the spokesman.
Customers used to leasing their vehicles will also have to grapple with a tougher financing environment. Detroit’s automakers have scaled back leasing amid big losses on SUVs, which they relied on more than their foreign competitors. Chrysler LLC has stopped leasing altogether.
One piece of good news: With car sales plunging across the industry, consumers should be able to at least nab a good price. Overall, U. S. sales of light-duty cars and trucks were down 26. 6 percent in September from a year earlier, according to Autodata Corp., a research firm in Woodcliff Lake, N. J. It was the first month since 1993 that less than a million new cars and light trucks were sold in the United States.
The best deals are being offered by General Motors Corp., Ford Motor Co. and Chrysler, whose sales have suffered the most.
GM’s “employee discount” program ended last month, but the automaker plans to offer discounts of up to $ 7, 000 on some models, the company said.
A 2008 Ford Edge with allwheel drive, meanwhile, can be had for a little bit more than $ 23, 500 in many areas after $ 3, 000 cash back, or customers can get zero percent financing for 60 months. Even a 2009 Toyota Camry, among the best-selling cars in the nation, has modest cash-back offers or zero percent financing deals in some regions.
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