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Cheap auto loans: use 'em now or lose 'em

[May 16, 2011.]


Every quarter, Comerica Bank, a financial services company headquartered in Dallas, publishes its Auto Affordability Index. This uses information on consumer spending on light vehicles, along with rates data on auto loans, to work out how many weeks of median family income it takes to buy and finance a new car at the average purchase price for the period.

Cheap auto loans mean affordable cars and trucks

The index's latest edition was released May 12, and covered the first quarter of this year. It shows that auto affordability held steady during that time. It took 23.2 weeks of median household income to purchase a new car of average price then, just as it had in the last quarter of 2010.

The index began in 1996, which allows you to add some historical perspective to auto affordability. Using Comerica's handy graph, you can see that--except for a period between the last quarter of 2007 and the last of 2009, when few people could buy anyway because lending policies on auto loans were so tight--new cars are more affordable now than they have been for more than 15 years.

In fact, there were a couple of quarters back in 1996 when it required more than 30 weeks of median household income to buy and finance a new car, and as recently as 2005 it could take 27 weeks.

Cheap auto loans getting more expensive

There was a fly in the ointment of the Comerica report. Rates for auto loans are rising, and the average during the first quarter was the highest for two years. So, although affordability remains excellent for now, there's no guarantee that that situation is going to continue.

Indeed, many believe that the opposite may turn out to be true: interest rates on all credit (including auto loans) could rise, as the Federal Reserve turns its attention from stimulating the economy to countering inflation. Dana Johnson, who's chief economist at Comerica Bank, may be one of those. In a statement, he last week opined:

"The total cost of purchasing a new vehicle increased approximately $425 in the first quarter of 2011, as consumers opted for more expensive cars against a backdrop of rising rates. Looking ahead, affordability has the potential to erode as financing costs and consumer appetites for more expensive vehicles increase."

Provider of auto loans hits pothole

Auto loans remain popular with many investors who like to buy up packages of consumer credit in the form of asset-backed securities (ABS). However, on May 3, Bloomberg reported that Ally Financial Inc. (which used to be called GMAC back in the day) is experiencing some local difficulties. Having become profitable again last year by rebalancing its business away from mortgages and toward auto loans, its first quarter profits were down 9.9 percent this year.

The company says that it expects "profitability to improve over time" and there's no obvious reason to doubt that. However, a hiccup this early in the U.S. economy's recovery may suggest that it's not going to be plain sailing all the way when it comes to auto loans.

Cheap auto loans now?

For some time now, this blog has been warning that the current era of cheap auto loans may have a short shelf life. And, to be honest, if you ignored that advice you wouldn't be much worse off now than if you'd followed it. But that doesn't mean that things aren't going to change, possibly quickly.

If you're persuaded that now is a good time to find cheap car financing, you can find quotes for cheap 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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