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Car Loans Back From The Brink

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TinyCars_Jeremy_Vandel_flickrWhen it comes to car loans, lenders are loosening up, according to new data from the credit bureau Experian. But that doesn’t mean we’ve returned to the heady days of 2006 and 2007, when basically anyone with a pulse could get a loan.

“If you don’t have strong credit, it’s still very difficult to get financing on new vehicle,” says Melinda Zabritski, Experian’s director of automotive credit.

A recent report by Experian explores changes to the auto loan market for the fourth quarter of 2010. More lenders are willing to give loans now than they were this time last year, Zabritski says, partly because fewer consumers are falling delinquent on payments. The rate of people falling 30 days delinquent on their car loans fell from 3.3% in the fourth quarter of 2009 to 2.98% in the final quarter of 2010, Experian found.

The number of repossessions also fell 6% in the last quarter compared to the same period a year before.

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“It wasn’t really a surprise,” Zabritski says, because lenders have focused so heavily over the last two years on giving loans to people with good credit, who typically have a lower tendency to fall behind on payments.

Still, the rate of change is striking to experts. “I mean, ‘wow’ that’s a really good improvement,” says Zabritski.

That makes lenders a bit more confident to loosen the floodgates, especially to borrowers with lower credit scores. The ratio of all car loans made to subprime borrowers—people with low credit scores —increased almost 25% over the last year, Experian found. And the ratio of deep subprime loans—people with exceptionally poor credit—grew by more than 20%.

If you have credit problems, though, that doesn’t necessarily mean you’re out of the woods. The big increase in subprime loans has more to do with the fact that the subprime market essentially went extinct in 2008 and early 2009, Zabritski says, than with a huge influx of loans to people with bad credit.

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“Even into early 2010, lending was constricted to the prime consumer,” says Zabritski. “So even now it’s a pretty tight market.”

As the subprime market begins to rebound, expect to see lenders offering better terms for borrowers. As recently as 2009, the average length of a subprime loan (for the lucky few able to get them) was 45 months. By the fourth quarter of 2010 that average rebounded to 56 months, much closer to the length of time that prime borrowers get to repay their loans.

So what does all this mean for the American car industry? Good things, Zabritski says.

“We consistently hear that people in the industry are cautiously optimistic,” she says. “There’s some great product coming out of Detroit, and if there wasn’t demand for those vehicles we wouldn’t see this need for financing.”

Image: Jeremy Vandel, via Flickr.com

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