Economists Remind Lenders Of Cautious Auto Lending

Economists believe that auto lenders should exercise more caution in doing business. This is because these creditors finance auto loans with lower interest rates. They have also reportedly been approving auto loan applications submitted by borrowers with less-than-desirable credit scores. An automotive expert says that if this pattern continues, lenders will most likely suffer soon.

It appears that the average credit score required to get approved loans for new vehicle purchases is now at 753 from 763 last year. For a risky approval of loans, banks would consider a credit score of 680. But when it comes to finance requests for used-vehicle loans, lenders would settle on a credit score of 662.

However, even those with bad credit can now get easy access on auto loans too. This can be done through the help of nontraditional firms offering bad credit loans to those who can prove their capacity to pay. Proof usually comes in the form of at least 3months of pay slip.

But despite the warnings issued by economists, primary auto lenders argue that there is still enough risk management in place. According to a representative of the group of lenders, they are still keeping a tight restraint on the loan-to-value ratio. The loan-to-value ratio is a calculation of the approved loan amount will be based on the value of the vehicle that is to be purchased. Most lenders would use a percentage of the value of the car to assess the right amount that can be given out as a bad credit loan.

Low LTV ratios are reserved for borrowers with higher risk of non-payment while the high LTV ratios are provided to borrowers with good credit score and satisfactory payment records. Hence, the LTV is a fairly reliable method when it comes to assessing risks.

“It’s Now Easier To Get Money”

According to the Experian Automotive, auto loans are much easier accessed in the second quarter of this year. The low down payment and reduced interest rate have definitely played major roles in this fact.

To support their claim, the company declared that as of the second quarter, the total cost of all refinanced vehicles was $25,714. This total is better by 1.9 percent compared to last year’s results. On the other hand, bad credit loans used to finance old vehicles is at $17,433, which is 2.2% better than last year.

Meanwhile, the interest rate of most auto loans went down from 4.8 percent to 4.6 percent this year. On the other hand, the interest rate of used cars for auto loans is set at 9 percent. However, exception of these interest rates would be individuals with a credit score of 550 and below.
“Dealers Can Sell More Vehicles”

Because the overall lending industry has improved, lenders are making more loans available. Hence, there is an increased demand for more vehicles and that’s the trend that pushes manufacturers to produce more autos. In fact, there has been a recorded 14% of vehicle production this year compared to the total sales of last year. The rate of growth actually exceeded earlier expectations.

But it is not just the improvement of the overall lending market that takes all the credit for the noted increase in production. According to auto manufacturers across the US, the total economic improvement in the country has also played an important role. Investors started coming in, providing more jobs and thus, better resources for Americans to start investing on vehicles.

The continued use of the LTV ratio is a smart identifier that despite the now wider reaches of lenders; there are still sufficient actions for cautious lending.