Next year may not be as kind to new car buyers with bad credit.
If you've been paying attention to the market recently, it's been an up-and-down ride for the past few days. Market volatility is just one of the indicators that the Federal Reserve may be considering a hike to the federal funds rate (probably not this year, though), which would impact borrowing rates in a record-setting year for the auto-loan business.
"It has the potential to impact auto loans, any rate increase certainly can," said Belinda Zabritski, senior director for Automotive Finance for Experian. "The rate depends on so many other factors in the market … (A rate increase is) at some point, likely. But there's not a strong chance that it will go up this year."
Rates for loans have largely stayed the same since 2008, when interest rates were lowered to spur lending after the recession. Many of the low-rates today haven't changed and automakers such as Subaru have offered interest-free loans on some of their cars.
"If you're not a high-scoring consumer, the likelihood of obtaining those (good) rates and programs is more of a risk. There's not a lot of chance of getting them if your score is under 600," Zabritski said. "The new vehicle market is a very prime market."
But that may all change by next year.
According to Experian, sub-prime borrowers (with credit scores between 500-600) and deep sub-prime borrowers (with credit scores lower than 500) comprise 34 percent of used car loans. Non-prime borrowers (between 600-700) are roughly 20 percent of that market, with prime and super-prime buyers comprising the rest.
Non-prime buyers may be considered sub-prime depending on market conditions and the lender.
Any rate hike would likely impact lower-tier borrowers, either making the loan unaffordable or by lenders tightening up their availability to reduce risk.
"The lenders are out there now, they have money to lend. If you were someone trying to buy a car in 2009, money was hard to come by. If you're getting a loan today, certainly you have a lot of financial options," she said.
Deep sub-prime and sub-prime borrowing were the second and third-fastest growing loan segments behind super-prime borrowers. Interestingly, super-prime borrowers received less money from lending companies than many other categories.
Zabritski said the federal funds rate is dependent on many factors including GDP and market conditions, so it's hard to predict any swing in the rates.
The post Sub-prime Borrowers May Get Bounced Out of the Club Next Year appeared first on The Truth About Cars.
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