As Loan Rates Drop, So Do Credit Scores of Car Buyers
U.S. banks and auto finance companies are once again welcoming all kinds of customers, even those with less-than-stellar credit. The average credit scores of new and used car buyers, which spiked during the economic downturn, have fallen to nearly the same level as 2008.
Better yet, experts don't think the credit pipeline will dry up anytime soon.
Low interest rates are making it cheaper for banks to get money, which makes them more willing to lend. The federal funds rate — or the rate at which banks lend money to each other — is now near zero percent, down from 2 percent in the summer of 2008.
Loans to subprime buyers — or buyers with credit scores of 679 or lower — are particularly attractive, since banks can charge higher interest rates. The average interest rate for a deep subprime loan — or a loan to someone with a credit score below 550 — on a new car is 12.9 percent, compared with 3.2 percent for buyers with the highest scores, according to Experian Automotive, which tracks automotive credit data.
At the same time, both banks and consumers have lowered their debts, meaning even subprime loans are less risky because they're less likely to be in debt and unable to pay. For example, just 0.57 percent of auto loans were 60 days delinquent in the first quarter of this year, compared with 0.78 percent in the first quarter of 2009.
Experian won't release second quarter data until next month, but analysts say the trend will hold as long as interest rates stay low.
"Consumer spending is still very conservative. People aren't going hog wild like they did before the recession," said Lacey Plache, chief economist for the auto information site Edmunds.com.
Here is what buyers with various credit scores can expect if they're shopping for a new or used car, and the estimated monthly payment — excluding sales tax — on a five-year loan if they trade in a car worth $5,000 for a new, fully-loaded $24,775 Toyota Camry sedan.
SUPER PRIME (740 or higher)
Loan rates average 3.2 percent for a new car and 4.4 percent for a used car, according to Experian. A super prime buyer could expect to pay $357 per month for the Camry.
Loan rates average 4.5 percent for a new car and 6.4 percent for a used car. A prime buyer could expect to pay $368 per month.
Loan rates average 6.5 percent for a new car and 9.5 percent for a used car. A nonprime buyer could expect to pay $386 per month.
Loan rates average 9.9 percent for a new car or 14.4 percent for a used car. A subprime buyer could expect to pay $419 per month.
DEEP SUBPRIME (549 or lower)
Loan rates average 12.8 percent for a new car or 17.9 percent for a used car. A deep subprime buyer could expect to pay $447 per month.
Auto loans suffered a similar fate to home mortgages during the financial crisis. When banks sustained losses and tightened lending requirements, the average credit score for new car buyers rose nearly 20 points to a high of 776 in the first quarter of 2010.
Standards have been loosening ever since, but only now are they approaching pre-recession levels. The average credit score for a new car buyer in the first quarter of this year was 760, while the average score for a used car buyer was 659.
The loosening standards are good news for the auto industry, which has seen a steady recovery despite bumpy economic news. U.S. car and truck sales are expected to climb as high as 14.5 million this year, up from a 30-year low of 10.4 million in 2009.
That's still well below the heady days of the mid-2000s, when easy credit drove annual sales to 17 million. But analysts say the growth rate this time is healthy and sustainable, with consumers making better financial decisions.
Buyers also have more options. In 2010, General Motors Co. bought AmeriCredit Inc., a Texas-based company that specializes in subprime lending, because GM's main finance company was unable to risk taking on subprime buyers. As a result, 8.2 percent of loans for GM vehicles went to subprime customers this spring, nearly double the number in 2010 before the AmeriCredit purchase. The average for the auto industry is 6 percent.
GM says subprime loans, if managed properly, are good for business.
"The recession created an awful lot of new subprime buyers, but it doesn't mean they're a bad credit risk," spokesman Jim Cain said.
Others are sounding the alarm about the easing of credit standards. In a note to investors Tuesday, Moody's warned that the subprime auto lending market is seeing the same kind of heated competition and poor underwriting that drove unexpectedly high losses in the mid-1990s. Moody's said loan performance has been strong over the past few years, but lenders should beware of weakening standards in order to increase profits and market share.