Subprime Borrowing Is Up and Some Regulators are Nervous

If you have bad credit and need a new car, now is the time to buy as more lenders are jumping into the subprime auto loan market.

Subprime Borrowing Is Up and Some Regulators are Nervous

When the recession hit the United States in 2008, most lenders started tightening up their requirements and made getting auto loans nearly impossible unless you had near-perfect credit scores. Luckily, as the economy starts rebuilding itself, some lenders have started to ease up on these requirements and have started working to help borrowers with bruised credit get car loans. In fact, so far this year, 27% of new car financing was given to applicants with credit scores under 500, which is the highest this number has been since 2007 when this information started being tracked.

Auto loans given to people with poor credit histories have helped the U.S. auto sales rise greatly over the last year or so, but it has some people very nervous.  There is no guarantee that these new car owners are going to be reliable or make their payments on time, and just because the rate of delinquency on car loans has been steadily dropping since 2011, they are not convinced that it’s going to stay that way.

Why it’s So Easy to Get a Bad Credit Auto Loan

The Federal Reserve has kept their word to keep the national interests low and more affordable for buyers of all credit scores. In recent years, if you tried to get an auto loan with a 500 credit score you would be laughed right out of the dealership because they would assume that you couldn’t afford to tack on another monthly bill with the outrageously high interest rates. Now, because the Federal Reserve has kept their promise of low interest rates, you are now being considered to finance or lease a new car. 

More and more lenders are realizing that there is a huge market in subprime lending, and they can make a pretty penny from it. They are taking advantage of the new ‘it’ thing and have jumped on the bandwagon, and are now lending to good and bad credit applicants alike, and want to help you get approved.

Dealerships and auto financing companies have begun realizing that if a borrower defaults on their loan, it’s easier to repossess their vehicle than their home; and therefore, have opted to take a bigger loss. Yes, we did say that they would be taking a bigger loss on a vehicle than a house, and this is because a vehicle is a depreciating asset. If the owner defaults, the dealer will take the vehicle and have to sell it at an auction, often times this is much less than what the remaining balance of the loan is – resulting in a large loss for the lending institution.

Requirements to Qualify

It’s much easier to qualify for a new car loan or new car lease with bad credit these days but there are still some things you must do and have in order to get the car. For example:

  • You must have proof of a steady income with a W2 or recent paycheck stubs
  • Proof of residency (usually a utility bill will suffice)
  • A valid driver’s license

If you have really terrible credit, like below 500, many lenders will also ask you to have both a larger down payment and a co-signer on the application. It may seem like a hassle to come up with the cash to put down on the vehicle loan, but it will help you in the long run by lowering the final finance amount, helping to lower your monthly payments, and possibly even helping with the interest rate. This is where your co-signer comes in.

A co-signer is usually a friend or family member that agrees to be a co-borrower on the application. This person should have a credit score that is considered good to help balance out your bad credit scores which helps you qualify for a lower and more favorable interest rate. You and your co-signer should know that they are agreeing to be legally responsible for paying back the loan amount if you happen to miss payments and default. If you miss payments, their credit will be affected just as yours will.

As We See It

It’s about that time of year to get the best deals on a new cars and if you have bad credit you can really take advantage of it. You not only have a good chance of getting approved right now with the loose requirements set by subprime lenders, but you can also get an added bonus of getting a discount with the year-end deals offered at the dealerships.

If you are to pick out your new car, but want to see how much you should be looking to spend, you can apply for a pre-approval online now. This will prevent you from falling in love with a vehicle that’s way over your budget at a dealership that won’t work with you. Let Auto Credit Express put you on track to the right dealership in your area to give you your best chance at an auto loan approval.

Posted on November 16, 2013 by in Auto Loans
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