New Car Loans and the Credit Crunch

New Car Loans and the Credit Crunch

The State of the Car Loan Industry

In addition to lows recorded in residential housing construction and retail sales, the US is also experiencing the weakest car sales period since 1981. Car dealers are experiencing a fifteen to twenty-five percent decrease in new car sales this quarter and, without a caped crusader to come to the rescue, sales will likely continue to slip. The central issue is the rapid decrease in the availability of car loans and most other forms of credit.

Qualifying for a New Car Loan

Due to the credit crunch, to qualify for a car loan, you now need an above average FICO score. An acceptable score to qualify for a loan is now 750. As a result, approximately 20 percent fewer auto loan applications are being approved this year compared to last year. The FICO score is the most popular credit scoring instrument which banks and other lending institutions use to approve credit, set interest rates, set collateral, and quantify income and assets. Despite lower interest rates, lenders are making the terms of car loans longer, up to eight years for premium models, and insisting on higher down payments, to make more money on each loan.

Deeper into the Wormhole

GM is losing 12,000 sales per month due to lack of credit. Credit is indispensable to the buying habits of Americans and the rising number of defaults in every category of consumer credit threatens the existence of the private loan market. As the credit freeze quickly paralyzes commerce, desperate times call for desperate measures. The US Treasury recently added car loans, student loans and credit card debt to the list of endangered species on its bailout list. The ambitious size of the plan will give Wall Street a psychological boost and infuse the "on-the-ropes" credit market with a will to live.

Advice for New Car Buyers

For those who must experience the intoxicating aroma of a new car's interior, take every measure to part with as little money as you can by considering the following :

• Know how much car you can afford. Beyond the monthly payment, can you afford the other expenses of owning the vehicle over its lifetime, such as insurance, maintenance and tires? If you are financing, learn the total you will be paying for the vehicle including tax, principle, and interest.
  
• Always negotiate a purchase price based on the dealer invoice price, not the sticker or MSRP.
  
• Research any dealer discounts and rebates that may be available. Dealers will often not tell you about these.
  
• Try to make a substantial down payment.
  
• Defer the purchase of a new car until you can pay cash.
  
• Consider buying a previously owned vehicle.
  
• Drive your current vehicle until the wheels fall off.

Get the Most for Your Dollar.

Convenience is expensive, and nowhere is that more true than the convenience of buying on credit. Credit is a precarious seductress, ruinous in the hands of the reckless. Use it wisely and follow the following tips :

• Opt for a shorter term for your new car loan and plan on keeping the car beyond the point when you pay off the loan, resulting in several years of no car payments and lower insurance rates.
  
• Pay off your car loan sooner. (check for prepayment penalties)
  
• Buy a model which keeps its value better. Trade-in value is currently very low. With housing values tumbling, consumer confidence is down, and resale car values are diminished.
  
• Leasing is the easiest way to throw your money away.
  
• Decrease your reliance on credit.

The Bailout's Effect on the Credit Crunch

According to the Los Angeles Times, it is unlikely that the bailout will cause an instantaneous resurrection of the credit market. Optimistically, experts believe that the bailout will achieve its primary goal; it will avert a complete implosion of the US financial system. Experts predict that the fear that has gripped the credit market may take a while to dissipate. Over the next few weeks, the hoarding of cash in the financial matrix should decrease and result in the appearance of increasing rates of return on some "no risk" Treasury instruments. There is little in the way of a "Plan B" if this does not happen.