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Auto Loans Set to Become More Expensive?

[Dec 6, 2009.]

 

Cheap Loans Are Yours--If You Qualify

For those with an excellent credit score, it's cheaper to borrow money now than it ever has been. Today, the prime rate is at 3.25 percent, which is an historic low. So whether you're thinking of taking out an auto loan, a new mortgage, or a replacement credit card, there are some seriously good deals out there if you're creditworthy.

It Can't Last

The trouble with anything that's at an all-time low is that it has only one way to go. True, it's just possible that current loan rates could yet be shaved very slightly. But it's unlikely. And most analysts agree that a rise is much more probable. But it's not just low rates that are likely to make auto loans more expensive and more difficult to get. There other pressures, too.

Auto Loans in Short Supply

Auto loan delinquencies were up again in the third quarter of 2009. And that means that lenders have to be more careful about their credit policies.

TransUnion, which specializes in credit and information management, published data last week that showed that the number of delinquent auto loans (those where borrowers were 60 days or more behind with their payments) was up 1.25 percent in the third quarter of this year compared to the same period in 2008.

Peter Turek, who is automotive vice president in TransUnion's financial services group, remarked: "As in recent quarters, both the availability of funding in the market, consumer demand for auto financing and tighter lending standards have contributed to a significant decrease in the number of auto loans in the market..."

Tighter Lending Ahead?

Traditionally, lenders have packaged up auto loans--much as they did mortgages--and sold them as securities to other financial institutions. That, of course, slowed down enormously when the credit crunch hit, and would have skidded to a complete halt had the federal government not stepped in.

In fact, a Federal Reserve funding program has been propping up the market in auto loan bonds for a while now. And the government is warning that this situation can't be sustained indefinitely.

Last week, Sheila Bair, chairman of the Federal Deposit Insurance Corporation, told Bloomberg:

Nobody has any confidence in the securities. If they just want to keep things the way they were and resist change, it doesn't work any more.

It's all about whether there's confidence in the assets that back the securitization. So it's heavy on disclosure, it's heavy on underwriting quality, it's heavy on incentives, skin in the game requirements.

Act Now

All of this is likely to create a perfect storm for auto loan borrowers. Interest rates are likely to rise while the supply of loans could further dry up. So if you're lucky enough to still qualify for today's ultra-competitive deals, you may well find that there won't ever again be a better time to take out that new loan.

So compare auto loan rates 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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