Lousy Credit? Need a Car Loan? No Problem!

New car loan
The fallout from the 2008 financial crisis still plagues would-be borrowers. Banks are still being pretty stingy about extending credit these days. Credit cards aren't nearly as easy to get as they were a few years ago. And ordinary folks are finding that only borrowers with high credit scores are being considered for a mortgage.

But there's one big exception, and it may be having a big effect on the economy: auto loans.

U.S. auto sales haven't yet returned to their pre-recession highs, but they've been surprisingly strong. Total sales of "light vehicles" -- cars, pickups, and SUVs -- were up 14.8% in the first half of 2012, and they're still picking up steam.

But what's driving it? After all, unemployment remains high, and many people who are employed have seen their earnings decline. Lots of folks have seen their credit ratings dented. It can't be easy for all those people to be buying new cars, can it?

Maybe it can be that easy for those with roughed-up credit to buy a car.

Subprime Loans Driving Auto Sales

It turns out that auto lending is one place where the banks are willing to be a little loose -- maybe even more than a little relaxed about lending standards.

New auto loans from banks totaled $47.5 billion in the first quarter of 2012. According to credit bureau Equifax, that's a seven-year high. Automotive finance companies added another $52.5 billion, says Equifax, up 49% from three years ago.

A lot of those loans are subprime loans.

A recent report from financial data firm Experian shows that the percentage of new auto loans going to subprime borrowers -- people with credit scores below about 680 -- has increased significantly in the last year, just as auto sales have taken off.

Some automakers are benefiting more from this than others. The Detroit News reported recently that Chrysler, whose sales were up a whopping 30% in the first half of 2012, has a special relationship with an arm of Spanish bank Santander (SAN) that specializes in subprime lending. That, experts say, has probably been a key contributor to Chrysler's recent success.

Is It Time to Worry?

Not necessarily. For one thing, default rates on auto loans are lower than they have been in years -- even as the percentage of loans going to subprime borrowers has risen. And defaults on auto loans tend to be less common than defaults on mortgages in general, probably because it's so easy for a lender to repossess a car -- and so hard for many people to get by without one.

And finally, this rise in subprime lending may just be a feature of the times we live in.

Many people had top-notch credit for years but because of the tough economy, have seen their credit dinged by unavoidable circumstances. Now that they're back on their feet, those people are probably still pretty good candidates for a loan. If banks are now starting to see that, it's probably a good thing.

At the time of publication, Motley Fool contributor John Rosevear owned shares of Ford and General Motors. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Ford and General Motors and have recommended creating a synthetic long position in Ford.

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14 Comments

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tahrrington1

hello

October 30 2013 at 7:37 PM Report abuse rate up rate down Reply
w_diago

A loan is a financial transaction in which one party - the lender - agrees to give another party - the borrower a specific amount of money which must be paid back in full.


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July 16 2013 at 8:12 AM Report abuse rate up rate down Reply
NWAutoLending.com

Consumers now have more choices than in the previous 4+ years. The great news is that lenders who specialize in subprime auto financing are experiencing the best loss ratio they have in the history of subprime auto finance. Basically what that means is those people who are getting approved for a car loan are actually paying for them. If you have less than perfect credit there are many lenders who offer programs via auto dealers that you can't find directly. This is called indirect lending. Most of the rates are determined by state law. All states have laws pertaining to maximum interest rates and they vary wildly. In some states like SC for instance any business who wants to offer auto financing actually applies for a maximum cap so there are many different rates there. In AR for instance the rates are some of the lowest in the country but as a result there are also fewer lenders willing to take the risk. The lender gives the dealer what is called a "buy rate". The dealer has the ability to increase that "buy rate" and receives a portion of the amount over the "buy rate" as payment for placing the loan with that lender. This is not the case in all situations.

There are many factors that go into the decision process of a lender who specializes in bad credit auto loans. Some of those are: your credit score, debt to income, job and residence stability and down payment. Any time a consumer puts some "skin in the game" in the way of down payment lenders are more apt to make exceptions to normal underwriting guidelines. So consider trying to come up with some sort of down payment, it will definitely improve your chances of being approved.

Nationwideautolending has a nationwide network of certified car dealers who have the skills and resources to help in most credit situations. It is embarrassing for many people to explain to a stranger about credit related issues as it is very personal. Our certified dealers understand and know how to help in some cases with very serious credit problems.

There are some things you can do to improve your chances. First be realistic, if you make $2000 a month you can't afford a $500 car payment. Typically depending on severity of the situation lenders allow maximum payments based on your gross monthly income before taxes. There are programs that allow for 16% to 22% of your gross monthly income. They also make adjustments for monthly mortgage or rent, minimum credit car payments and other monthly payment obligations you may have. There are many resources available online to determine the maximum you may qualify for but that doesn't mean you want to spend the maximum. Know what you can really afford. Also try to put as much down as you can comfortably afford.

There are no restrictions on having to buy a new or used car, it's what works best for you. Make sure the dealer is certified to provide the best service for you. Don't be afraid to apply online. It's safe, secure and free and offers approvals the very same day.

August 03 2012 at 7:50 AM Report abuse rate up rate down Reply
leqtepie

baicas3 i think i got you beat i have twice as much mileage on a well-driven and paid FORD TAURUS! Yeah for Ford that no one believes makes a decent vehicle. I guess we both got a good one off the line! lol I am not able to go out and buy anything due to economy and low income offered for any position that I apply for and I work a part-time job to compensate for that loss of pay. When I got laid off from my corporate full-time position w/ benefits. I have been in survival mode for the last 3 years for the basic neccessities: shelter, food, utilities and fuel for car to get to the remedial jobs. oh and by the way SS says I am over income because I live alone, have no children and I am not handicapped or have any medical conditions (besides depressions and close to a breakdown from the stress).Lastly, I have been through the subprime with a house and ex-fiancee, I am not going through it with a car!

July 31 2012 at 9:21 AM Report abuse rate up rate down Reply
baicas3

My car is ten years old and paid for, it has 176,000 miles on it. NOT BAD FOR A FORD ESCORT!!! At any rate, I can't afford to go into debt again to get another car, and I have a full time job, I have other obligations to pay off first, like medical bills, and a loan...I don't care if they are easy to get, I won't be getting one for awhile.

July 30 2012 at 10:17 PM Report abuse rate up rate down Reply
hello chubby

santander is the worst finance company on the planet,if you buy a chrysler and use them you are in for a rude awakeing and more trouble than you know off,,stay away from the spanish owned company,they aer bad,bad people to deal with no good service and noone to tell you anything about your loan or what you owe........stay away from them......

July 30 2012 at 10:09 PM Report abuse rate up rate down Reply
docpaulkids

Well you forget to mention that these loans to people who have fair or bad credit come with extremely high interest rates from 15-25% and the dealer holds the title or deed until the car is paid off so they have nothing to lose....
People with good to excellant credit are afforded auto loans with 0 to 3 or 4 percent interest.

July 30 2012 at 5:44 PM Report abuse +1 rate up rate down Reply
davefromfwb1

They'll loan you money but if your self employed for the past 15 years they'll DENY you. I have great credit but can't get a loan because I'm self employed, they don't even bother looking at how much I make or how much I'll put down....as soon as they as me what I do for a living....they say, we're sorry sir we're not making loans yet for self employed people.

July 30 2012 at 5:39 PM Report abuse rate up rate down Reply
1 reply to davefromfwb1's comment
vlady1000

and what is the most amazing thing is ...owners are the last ones to get laid off!!!! Never could understand the bank's reasonning on it.

July 30 2012 at 7:40 PM Report abuse rate up rate down Reply
ragtopdaz

Welcome to Obama motors, We here at Obama motors are dedicated to helping you get the car of your dreams. No job? No problem. No citizenship? No problem at Obama motors. Does $4.00 gas have you down? Hey, get a new Obama car. Financing a problem? Not at Obama motors, our crackpot financing team will negotiate on your behalf to get the best price for you! Just yesterday we saved a customer $38.00 on a $36,000.00 car! Just think after saving that much money you might even be proud for the first time in your adult life! So don't delay.

July 30 2012 at 4:15 PM Report abuse rate up rate down Reply
1 reply to ragtopdaz's comment
Frankie

Are you like 12 years old? Or just plain stupid?

July 30 2012 at 4:26 PM Report abuse -4 rate up rate down Reply
revelation58

I got a car Loan but my credit is only 554 score. Interest Rate is about 30%.

July 30 2012 at 3:41 PM Report abuse rate up rate down Reply
1 reply to revelation58's comment
vlady1000

wow. No car is worth that. Save for used car somehow and you will save HUGE money in 5 years.

July 30 2012 at 7:42 PM Report abuse -1 rate up rate down Reply