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Auto loans could be hit by nation's downgraded credit rating

[Aug 8, 2011.]


For some time now, it's been a pleasure blogging about auto loans. It's much more fun reporting good news than bad, and there has been plenty of the former. Compared with a couple of years ago, it's way easier to borrow to buy a car, and, generally speaking, considerably cheaper too. There are even no-credit-check loans to be found again.

Auto loans' availability at risk?

Unfortunately, it's now necessary not just to rain on the cheap-auto-loans parade but to deluge it in a downpour of monsoon proportions. Because there's a real chance that the good times could skid off the road very soon indeed.

Unless you've been on an Arctic expedition, you're likely to know that Standard & Poor's reduced the U.S.'s credit rating on Friday. At the time of writing, the markets on Wall Street are yet to re-open, and nobody knows for sure what their reaction to the news might be. However, the weekend's newspapers have not been short of apocalyptic scenarios.

Yesterday's New York Times warned:

If the economy falls back into recession, as many economists are now warning, the bloodletting could be a lot more painful than the last time around. Given the tumult of the Great Recession, this may be hard to believe. But the economy is much weaker than it was at the outset of the last recession in December 2007, with most major measures of economic health ... worse today than they were back then.

Last time around, the supply of auto loans dried up faster than a stranded tourist in Death Valley. Indeed, even people with stellar credit scores who were prepared to pay high rates sometimes found their applications declined.

Cheap auto loans also threatened

But optimism is a national trait, so let's assume that we don't end up double-dipping our collective toes in recession. Well, if you believe The Washington Post, auto loans may well get more expensive anyway. That's because most economists expect a knock-on effect on consumer borrowing from the higher rates the federal government is likely to have to pay in the wake of its credit downgrade. Here's how yesterday's Post described what may happen:

The interest rate the United States pays on its short-term loans is determined by the market for Treasury bills. The downgrade could increase the yields on those bonds, forcing the government to spend more to borrow the same amount of money. Many consumer loans, such as credit cards and mortgages, are linked to the yield on Treasuries and therefore would also rise.

Some consumer loans are lent on a fixed-rate (rather than variable-rate) basis, and you should check your documentation to see whether yours could rise.

Last chance for auto loans?

If all these dire predictions turn out to be true, then it could be years before you can again find finance to change your car. But you could try acting now in an attempt to sneak in before lenders' shutters come down. Check out the competitive quotes for auto loans on this site.


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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