When the global fiscal crisis hit the economy in 2008, approval for bad credit loans from big banks such as the Bank of America and Capital One bank proved very difficult. Banks are often doubtful of an applicant’s capacity to pay back loan on time. So to make sure it’s a secure loan, banks conduct a thorough check on credit records. Often, this long process of digging into credit records coupled with high interest rates discourage people, especially those with poor credit scores, to get loans.
Those whose credit scores fall anywhere between 680 and 739 might have to pay a 4.5% annual percentage rate on their loans. People with credit scores below 680 will have to pay a much bigger annual percentage rate ranging from 6.5% to 12.9%.
Lenders entice borrowers with more flexible terms
But loan experts say the situation is slowly changing. According to a study by the Experian Automotive, the auto financing industry is approving more car loans even for those with poor credit standing. In the first three months of 2012, the average credit score for new vehicle buyers was up at 760. On the other hand, the average credit score for buyers of used vehicles fell four points to 659.
Analysts think lending firms tend to be more willing to make more loans to subprime borrowers, whose credit scores are between 550 to 619. According to Experian’s quarterly credit analysis, in the first quarter of 2012 car loans to buyers with nonprime (620 to 679) to deep subprime (below 550) credit scores increased by 11.4%. The study also found that lending firms now offer lower monthly interest rates and work out more flexible terms. This new scheme has enticed more borrowers into getting bigger loans. The average auto loans for new cars climbed up to $25, 995. Auto loan rates for used vehicles also went up to $17,050.
Why lenders are willing to finance more loans
Insiders say more lending firms are willing to lend money because more debtors are paying back their loans on time. Financial reports indicate that the number of late payments has dramatically decreased to 12.1% and that cases of vehicle repossession went down by 37.1%. To lending firms, the subprime bracket seems attractive because if the risk is managed properly, the higher interest rates charged to these borrowers can be huge.