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Cheap loans on increase as auto lenders propel new and used car markets

[Apr 11, 2011.]


Car buyers are defaulting on their auto loans less frequently and are also paying more for both used and new cars, according to the auto industry trade publication Collections & Credit Risk. This makes what is already a high-margin segment of the consumer lending market even more appealing for banks, credit unions and finance companies. But there is no telling how long cheap loans will continue.

New car sales in the U.S. jumped 17 percent at the beginning of 2011, and an index for used-vehicle pricing at franchise dealerships was up 6.2 percent from the year before, according to Collections & Credit Risk.

Auto loans getting bigger

Used car values have climbed because used-car inventories are lower, and the average size of a used-car loan increased $711 to $16,992 in 2010, according to Experian's automotive finance research unit. On the new car front, such features as onboard navigation have boosted the average price of a new car even as the size of the average car sold has decreased. The average loans for a new cars increased $209 to $25,789 in 2010, according to Experian.

Not only is loan volume and loan size up, but people are doing a better job making auto loan payments. The percentage of loans 60 days or more past due dropped to 0.7 percent, which is down from .89 percent fromthe like period a year ago. The average auto loan charge off, which is the amount lenders assess after a vehicle bought on credit has been repossessed and sold off, fell from $9,089 in 2009 to $6,929 in 2010, according to Collections & Credit Risk.

Cheap loans driven by competition

A good sign for car buyers who need a loan is the emergence in recent years of credit unions as auto lenders. Credit unions' market share has grown from 10 percent to 17.5 percent in the last three years. This adds up to increased competition among lenders for a share of the $634 billion U.S. car loan market, and increased competition means consumers are more likely to secure cheap loans. In fact, whenever lenders complain about too much competition, car buyers have reason to smile.

People with a poor credit history won't have much to be happy about, however. Many lenders are no longer allowing "dealer accommodation" loans, which is a type of loan sometimes granted to high-volume dealerships specifically for unqualified car buyers. Dealer accommodation loans are still hard to come by in this economy.


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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