Tag Archives: car loans

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Auto Loans Reach All-Time High

Experian released a report on auto loans today. Here are the high points:

  • The average credit score for a new vehicle loan dropped slightly, going from 714 in Q1 2014 to 713 in Q1 2015. The average used vehicle score moved slightly higher, from 641 in Q1 2014 to 643 in Q1 2015.
  • The average used vehicle loan was $18,213 in Q4 2015, up from $17,927 in Q4 2014.
  • The average interest rate for new vehicles was 4.71 percent in Q1 2015, up from 4.54 percent in Q1 2014. Similarly, the average interest rate for used vehicles increased from 9.01 percent in Q1 2014 to 9.17 percent in Q1 2015.

So interest rates have inched up, along with car prices. Elsewhere in the report, they mention that the length of loans is increasing as well. Some people are even taking out 84 month (!) loans for used cars.

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Running Out the Clock on Debt

If you have charge-offs or collection accounts on your credit report, you’ve probably heard that debts can no longer be collected after the statute of limitations expires. That’s true–sort of. The devil is in the details, though. So here are some important distinctions about running out the clock on old debt.

On a personal note, I have done this myself. I had a few charged-off credit cards that went into collections several years ago. Some lenders had sold the debt, and others had kept it and hired collection agencies to try and collect.

At this point, I was well into my credit repair journey, and I knew that if I could make it 4 yeas from the date of first delinquency (without getting sued or doing something to extend the statute of limitations–more on that later), I was home free. At the time though, 4 years (the statute of limitations in my state) sounded like forever.

Running out the clock should never be your Plan A. It’s more like Plan B, C, or D. But you need to be aware of the statute of limitations and some other important info no matter what your plans are. 

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How Much Will Auto Loan Rates Increase if Fed Raises Rates?

With interest rates at a historical low right now, it’s only a matter of time before they go up again. Maybe next month, maybe next year, but it will eventually happen. These things are cyclical.

If you’re in the market for a new car, now is a pretty good time to take out a loan. If the Fed raises rates, however, what will happen? This is the first I’ve seen someone put a concrete figure on it:

…should interest rates rise later this year, some households and corporations may find themselves overleveraged as interest rates and borrowing costs rise. When looking at interest rate sensitivity by loan product, we see that auto loans rates are the most sensitive to changes in the fed funds target rate. In addition, we can see that for each one-percentage point rise in the fed funds rate, the interest rate on a 48-month new car loan rises 0.61 percentage points.

So that’s the magic number. Expect a larger increase for longer loans and used car loans.

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Credit Tightens, But Not by Much

Credit numbers are out for the last quarter of 2014. Here are the highlights from ZeroHedge:

Housing Debt

  • Originations, which we measure as appearances of new mortgage balances on consumer credit reports and which includes refinanced mortgages, increased slightly, to $355 billion, but remain low by historical standards.
  • About 122,000 individuals had a new foreclosure notation added to their credit reports between October 1 and December 31.
  • Mortgage delinquencies improved, with the share of mortgage balances 90 or more days delinquent decreasing slightly; 3.1% of mortgage balances were 90+ days delinquent during 2014Q4, compared to 3.2% in the previous quarter.

Student Loans, Credit Cards, and Auto Loans

  • Outstanding student loan balances reported on credit reports increased to $1.16 trillion (+$31 billion) as of December 31, 2014, representing about $77 billion increase from one year ago.

And the kicker:

  • Student loan delinquency rates worsened in the 4th quarter. About 11.3% of aggregate student loan debt is 90+ days delinquent or in default in 2014Q4, up from 11.1% in the third quarter.
  • Auto loan delinquency rates worsened. The 90+ days delinquency rate is now at 3.5%, up from 3.1% in the previous quarter.

That’s a lot of deliquency. Nearly 1/8 of all student loan debt is 90+ days late. And that debt doesn’t go away.

 

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Revolving Credit Surges; Auto and Student Loans Slow

From ZeroHedge:

The most notable aspect was the $5.77 billion surge in revolving credit (e.g. credit cards) as Americans extended and pretended into the holidays – the biggest rise since April, and the second biggest monthly increase since the GFC…student and auto loans rose by the smallest amount since February 2012!

So student loans and auto loans are still increasing; they’re just growing at a slower rate.

I suspect this has something to do with the fact that so many loans have been made, they are reaching the saturation point. With student loan debt at all-time highs, there isn’t much room for more growth.

Still, lending standards are loose. If you have good financial habits and low debt, now is a great time to get a loan and move up the credit ladder.

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Auto Loan Surge Fueled by Sub-660 Credit Scores

Much of the economic “growth” over the past few years has been a result of subprime auto loans boosting car companies’ profits. And the trend has gone on so long some car dealers are starting to worry.

From CNBC:

Consumer confidence is perhaps the best indicator of why auto sales are running so strong. For years, it’s been clear that as consumer confidence goes, so go auto sales. The most recent reading has consumer confidence at its highest level since 2004. Not surprisingly, auto sales this year are expected by many to reach or exceed 17 million vehicles for the first time since 2001. Last year, U.S. auto sales totaled 16.52 million vehicles…”Nothing is typical with this cycle. We’re all holding our breath wondering how far this can go,” said Krebs. She pointed out that the possibility of higher interest rates later this year and an impending surge of used cars that will hit the market once they reach three or four years in age could both slow down new car sales.

Yes, interest rates will have to go up eventually. So if you have the means and have developed the good financial habits necessary to handle a car loan, then now is the perfect time to step up the credit ladder and get a car.

If you’re not going to need a new car in the next couple of years, don’t get one. It’s not worth it just to get that loan reporting on your credit scores.

But also keep in mind that we’re at a historically unprecedented interest rate level right now. Rates won’t be this low for a very long time, so if you’re planning to buy a car in the next year to 18 months, you might consider pulling the trigger, as long as you can afford the payments based on your current income.

This is a good time for smart people with good financial discipline to take advantage of low interest rates and profit.

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Auto Loan Delinquencies at Highest Since 2008

From the Wall Street Journal:

More than 8.4% of borrowers with weak credit scores who took out loans in the first quarter of 2014 had missed payments by November, according to the Moody’s analysis of Equifax credit-reporting data. That was the highest level since 2008, when early delinquencies for subprime borrowers rose above 9%.

So 1 in 12 people who took out a car loan in the first quarter of 2014 were already missing payments by November. That’s why the loans were considered subprime to begin with, but still…that’s pretty high.

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Auto Loan Bubble: Bad for Economy, Good for Savvy Consumers

Subprime Auto Loans at All-Time High

Graph courtesy of ZeroHedge. I’ve blogged about this before. This bubble will burst like all other bubbles do, which will harm the economy. But If you’re responsible enough to take on debt to buy a car, now is a great time to get an auto loan–rates are low, and they’re handing them out like candy on Halloween.

However, if you’re still trying to get your financial house back in order after getting in over your head with debt (like I did during the 2009 crash), do not take on new debt. Better to let this opportunity pass than to undo all the hard work you’ve done getting out of debt.

Before getting a loan, do a hard, realistic self-examination. Can you afford the payments comfortably, now (i. e., not once you get that raise/promotion/winning lottery ticket you’re certain you’re going to get)? If not, don’t get the loan. Buy a crappy car you can pay cash for and accumulate savings while you build/rebuild your credit.

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Subprime Auto Loans at 8-Year High

From Equifax:

The total number of new loans originated year-to-date through June for subprime borrowers, defined as consumers with Equifax Risk Scores of 640 or lower, is 3.9 million, representing 31.2% of all auto loans originated this year.

In other words, nearly a third of all car loans made this year have been to people with credit scores below 640.

This is great news if you’re looking to buy a car. For those of you who are rebuilding your credit and have developed the self-discipline necessary to handle a loan, there’s never been a better time to apply. Rates are low, and people are getting approved right and left. I recommend going with a credit union for the best rates.

And as always, if you’re not able to comfortably make the payments with your current income, don’t take out a loan. Better to sit this one out than to take out a loan you can’t afford just to try to improve your credit.

The credit ladder will still be there tomorrow. Make good choices.