If you pay attention to the financial news, you’ve probably heard concern about how, and why, the auto financing market is expanding. Some are worried that we’re seeing, in smaller scale, a repeat of what happened in the mortgage markets in 2008. But analysis has shown that what’s driving the automotive financing market is not the borrowers everyone thought.
The Big Time
Experian, one of the three key credit bureaus in determining who’s the best possible risk, announced recently it had seen a growth in auto loans to $86 billion. What was interesting, though, was where the strongest growth was.
The general wisdom has been that it’s been borrowers with poor credit who have been propping up this market. That’s been a point of concern for a few reasons, but the biggest has been that if people stop paying for their auto loans, it’s going to severely impact the industry. It turns out, however, that it’s the people who can most afford a new car driving the boom.
So-called “super prime” borrowers, or consumers with excellent credit scores, is the sector seeing the most growth right now. That’s not to say there wasn’t growth in loans for those of us without great credit, but that growth lagged behind the super prime borrowing. Furthemore, Experian found that less than 3.5% of all current car loans were behind in payments, which is a strong indicator against a bubble. If a bubble were forming, many, many more car loans would be further and further behind.
What This Means For Borrowers
The first, and most important, lesson we can take away from this is that auto financing is going to remain easy to find for people of all credit levels for a much longer time than some expect. A bubble is a dangerous environment because bubbles pop, and usually when they do the bill comes due to those who can least afford it. So if you’ve been hesitant about borrowing, you don’t have to be.
More importantly, it shows the overall health of the automotive lending sector, which long-term is good news for everyone. As we’ve noted before, auto financing is unlike other types of financing in some very important ways; just one example being that a car is much cheaper than a house.
That said, there is a point of concern in that the overall term of loans was shown to be rising. The longer your car loan goes for, the more money you’ll pay in interest and the less valuable your car will be, which in turn can lead to your car being “underwater,” that is, worth less than the money you owe on it. That should be of far more concern to consumers than any theoretical bubble.
Essentially, what you should take away is that you can secure financing for your car, no matter what your credit level. But the classic rules of buying any expensive purchase remain in place; look for the best deal, figure out what it will really cost you … and don’t take anything for granted.