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Are borrowers of auto loans shopping around enough for great deals?

[Nov 7, 2011.]


Equifax, one of the big-three credit bureaus, last week published new research that suggested finance companies are responsible for an increasing proportion of auto loans, a trend that is at the expense of banks and credit unions. For many borrowers, that may not be a good thing.

Auto loans and shopping around

Unfortunately, the Equifax National Credit Trends Report doesn't differentiate between finance company loans that are arranged through dealers and those found online by borrowers themselves. And that can make a big difference to how good a deal a car buyer ultimately gets.

As the Center for Responsible Lending (CRL) warns, many dealers find out the interest rate that a customer qualifies for, and then jack it up, keeping the difference for themselves as extra profit. The CRL calculates that, as a result of this practice: "Consumers who financed cars through a dealership will pay over $25.8 billion in interest rate markups over the lives of their loans."

Get multiple quotes for auto loans

Shocked? You shouldn't be. That's just one in a whole list of dubious practices and outright scams that all-too-many dealers routinely deploy in order to maximize their incomes from the auto loans they arrange.

As this blog regularly advises, vehicle buyers should obtain quotes from multiple sources (bank, credit union, online…) for auto loans before they first set foot on a dealer's lot.

Auto loans continue to be more available

One piece of good news from the Equifax report is that auto loans are continuing to become more available to a wider range of borrowers. Four of the headline results from the study were:

  1. Auto loans for subprime borrowers make up 38.5 percent of all those now written by finance companies, and 17.5 percent of those from banks and credit unions.

  2. In July, 1.7 million auto loans were originated in total, and together these were worth $32 billion.

  3. Finance companies wrote 854,800 auto loans in July 2011, compared with 581,300 during the same month in 2009.

  4. People falling 60 days or more past due on their auto loans are getting fewer. Only 1.63 percent of these loans were delinquent in this way in July, way down from the post-credit crunch peak of nearly 3 percent.

Auto loans aiding recovery

All of this positive activity is helping Detroit car makers and the wider economy. Today's Financial Times notes:

Stubbornly high unemployment, poor consumer confidence and even high petrol [gas] prices were not enough to keep buyers away from showrooms in October as sales hit the highest level in eight months and rose 9 per cent year-to-date. Automakers – or at least those not from earthquake-crimped Japan – are appropriately upbeat…

And it went on to explain that the news was especially good for two reasons:

  1. Most of the sales were retail, rather than lower-margin fleet ones.

  2. There were fewer incentives on offer, meaning that the industry got to keep more of the sticker price.

That second point tends to support an assertion made last week on the SmartMoney website. Under the headline, "As Car Sales Jump, Deals Disappear," it quoted TrueCar.com vice president Jesse Toprak: "Automakers are becoming much more selective as to where they offer incentives."

So, if you're thinking of buying a car, now might be a good time to act. Just don't forget to find those competitive quotes for auto loans first.


About Author:

Peter Andrew has been writing about -- and for -- business for more than two decades. For the last couple of years, he has found himself increasingly specializing in the U.S. financial sector.

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