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It's a great time to get approved ... but should you be cautious?

[Oct 17, 2011.]


The readers of the Rebuild.org auto loans blog are a pretty smart bunch. So it would be inappropriate to lecture them like small children on the dangers of credit. It's all right. That's not going to happen today, so you can keep reading.

If you look back over the last few news blogs, however, you can see how much more widely available auto loans are now than they have been for years. And that includes no-credit-check loans.

That surely has to be a good thing. It helps economic growth, and it allows people who've previously been denied auto loans the chance finally to change their old, worn-out cars. But, just because someone's prepared to lend you money, that isn't always a good reason for you to borrow it. So this is a plea to think seriously before you take on any new credit at the moment.

Delinquencies on auto loans set to rise?

So why the sudden concern? Well, a few recent reports have been enough to give anyone pause.

First up, the American Bankers Association (ABA), which on October 5 published its latest findings on consumer delinquencies, which are defined as when people fall behind 30 days or more on loan payments. The report said that delinquencies for direct auto loans (those arranged directly through banks) rose to 1.23 percent from 1.20 percent during the first half of this year. Delinquencies on indirect auto loans (set up by third parties, such as dealerships) increased to 2.89 percent from 2.72 percent over that period.

Then there was another report, this time from FICO, the credit scoring company. This one, also released on October 5, included the results of a survey of risk managers in American banks. Andrew Jennings, a FICO executive, blogged:

Auto lending had been a bright spot in our previous quarterly surveys, but in the latest survey, 30 percent of respondents expected delinquencies to rise on auto loans and 21 percent expected them to fall. That is a clear shift in banker sentiment.

Household incomes under threat

Even scarier statistics can be found in an October 10 publication from Sentier Research. Using government sources, this suggested that real median household income has been falling more quickly since the recession than during it.

That's a stunning thought, but the figures are even more extraordinary. By June 2011, real median annual household income had plummeted to $49,909 from a high of $55,309 in December 2007.

Auto loans and you

You can see why it's necessary to give more thought than usual to the whole business of auto loans. If those household income trends continue, then payments that look easily affordable when you sign an agreement now could be causing you real hardship two or three years down the road.

Of course, if you need to change your car, you need to change your car, and this blog isn't intended to put you off that. But you may want to follow two courses of action:

  1. Perhaps be a bit more conservative in deciding how much you can afford.

  2. Shop around for the best possible finance deal by getting a number of quotes for auto loans. In the coming months and years, you could be glad you did.


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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