The auto loan industry has been at odds with itself for the past year. Loans are being issued left and right and consumers are buying more cars at higher prices, but some are concerned that a bubble is building. However, evidence is increasingly pointing towards no such bubble, and we got a rather dramatic demonstration of that just recently, evidence that no such bubble is in sight.
Many Loans, Few Defaults
Auto loan delinquencies, where those with a loan are behind on their payments, are the lowest they have ever been, at .81% of all loans. This despite a growing “subprime” loan sector, where people with poor credit are better able to secure auto loans.
To understand why this is a big deal, let’s break down how a financial bubble works. As a financial sector begins growing, more money begins flowing into it. As demand increases for auto loans on the part of banks and lenders, credit terms begin to loosen and more money is available to people of all credit levels.
In theory, the bubble pops when the credit terms get too loose, and loans are issued to people who are unable to make their payments. The bank loses the money it loaned, and demand sharply declines as the financial markets decide the loans are a bad investment. In the worst case scenario, like the housing crash of 2008, the bottom drops out of the market altogether and the value of the products in question plunges.
This is nightmarish for any industry, but in auto lending, the fear of a bubble is particularly acute. Even the perception of a bubble will make securing an auto loan that much more difficult, as many auto loans are issued via the car manufacturers or through dealerships, and thus corporate profits are at risk. But what does the lack of fear of a bubble mean for the consumer?
More Loans, More Money
In the short term, it means now might be the best time to get an auto loan. As lenders are secure in their finances, and believe they’ve got the best possible loans in place for the future, it means they’re more willing to consider a variety of different customers, even those with less than perfect credit.
It will also create more competition, which is best for the consumer. The more lenders seek to get your business, the more likely they are to offer terms favorable to your wallet to draw your attention.
Finally, it means that in the long term, more and more lenders will enter the auto loan market, and that means more and more products for consumers to choose from. The more consumer choice is available, the more likely you are to find just the right loan for just the right car that fits both your needs and your budget.
In short, this might just be the best possible time to buy a car. If you need to get back on the road, whether you have bad credit or good credit, whether you just need a used car or are looking to get a new car you’ll keep for years, you’ll get the best possible deal.