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Are cheap auto loans going, going, gone?

[Feb 28, 2011.]


With so much cheerful news surrounding car buying in general and auto loans in particular, it is necessary to return now and again to the fact that there are signs that the good times won't roll on forever.

Right now, auto loans are one of the very few growing areas of consumer credit. In fact, the expansion is very fast. That's partly because investors who buy debt from lenders see auto loans as a safe haven for money. People are generally borrowing less on credit cards (although the Federal Reserve showed a small rise in December after 26 consecutive months of falls) and the mortgage market continues to tank. So investors have little choice. Oh, and they know that many consumers would lose their cards and house before they allowed the repo person to come after their car, so the chances of default tend to be lower.

Cheap auto loans still widely available

It's still very cheap to buy a car. Comerica Bank unveiled its auto affordability index on Feb. 16. In the fourth quarter of 2010, it took just 23.2 weeks of median family income to buy a new car compared with 23.7 weeks in the previous three months, according to the index. To put that into context, it took more than 30 weeks at the end of 1996 and about 27 weeks at the start of 2006. At the end of 2007, just before the credit crunch hit, it was still over 26 weeks.

The bank's study only relates to new cars, and it's likely that heavy discounting on sticker prices and great trade-in values have played their part in improving affordability. That's because interest rates on auto loans are already on their way up. In fact, Dana Johnson, Comerica chief economist, says they're at their highest since the first quarter of 2009.

Of course, auto loans are still relatively inexpensive by historical standards, but the trend does appear to be upward. Comerica's Johnson said, "looking ahead, affordability could erode as the cost of financing a new car increases due to rising interest rates."

Rate rises widely predicted

On Feb. 24, The Financial Times ran a story headlined "US banks brace for interest rate rises." There's no need to panic, however. Pointing to the slowness of the recovery and low inflation as reasons why the federal-funds target rate has been low, the Financial Times report said, "few economists expect monetary policy to tighten before the end of the year."

However, it does appear some increases are inevitable. And when that federal-funds target rate rises, other rates will follow suit.

Cheap auto loans now

Only you can decide whether now is a responsible time for you to sign up to borrow for a car. But, if you're holding back in the hope of an even better deal, you could be making a mistake. Why not check out quotes for cheap auto loans now?


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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