Why are car loans so easy to get?
You will have trouble getting a mortgage or personal loan if you have bad credit. But can you get a car loan? You bet.
This post comes from Kali Geldis at partner site Credit.com.
If you've had trouble getting approved for a mortgage, a credit card or a personal loan recently because your credit isn't up to par, you aren't alone. We get readers writing to us often in our Credit.com Forum about their trouble getting access to credit. But one type of loan is open to nonprime consumers -- auto loans.
The most recent Experian-Oliver Wyman Market Intelligence report found that even consumers with the worst Vantage scores -- F-level borrowers -- are getting access to auto loans with an average balance of $15,300. Auto loan originations have been on the rise for the past few years, according to the report.
So what makes these financial products so readily available to consumers with credit scores that aren't among the elite? Alan Ikemura, senior product manager of Experian Decision Sciences, says auto loans have always been a credit product that is more open to subprime borrowers.
"Auto originations have really been a different product than the real-estate type of product or even bank card products," Ikemura says. "It's not a new phenomenon that creditors are lending to lower tiers, except now you're starting to see more of that."
The key to auto loans' wide availability is one simple reality of cars -- they can be repossessed.
"Lenders are, in general, more comfortable about being able to recover their money should there be a problem because they can repossess the vehicle," Ikemura says. "That in itself opens it up to lenders being more comfortable about taking the risk."
Also, Ikemura says, auto loan borrowers are making their car payments a higher priority, which is putting more lenders at ease about the risk.
"Lenders have seen a trend during this recession period of a payment hierarchy," Ikemura says. "Mortgage payments used to be the top of the payment hierarchy. People now need their automobile to get to the job they have; and that's become a priority. We've seen that delinquency go down on the lower tiers. It's moved up the chain."
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The new car business is one of the few industries that absolutely cannot survive without an endless supply of credit provided to people who cannot afford something that they do not need. Witness the collaspe of the auto industry after the financial crisis.
Do you think the price of an average new car would be 25K-30K if people couldn't get 72+ month loans with zero down? It is easier for a subprime customer to get new than used. No money, no credit, no problem!
This article forgets to mention the facts on two big facts of repossession of autos:
1. The lender will never get what the car is worth, or what they loaned, but they will recover some of their money.
2. Cars really aren't that easy to repossess in some states. The law on repossession varies from state to state.
Try doing a a repo on private property in my state and the repo can be stopped simply by the car owner interfering with the repo. Also you can't enter a private garage or move another car out of the way to repossess a car here.
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