It's Still Tough to Get an Auto Loan

July 21, 2010

The market is recovering slowly because credit is still very hard to come by.  We've seen encouraging signs that credit standards are loosening and auto loans are on the rise -- but buyers with less-than-ideal credit still face an uphill battle in getting approved.  While media reports suggest the climate even for subprime borrowers is getting better, chances are, it's still much worse than it was the last time you needed to buy a new car.

The AP reports that the approval rate for buyers with excellent credit scores, defined as 750 or above, is very strong--over 90 percent in June.  Automakers are marketing heavily to this group, advertising zero percent financing on many cars, but only for those with near-perfect credit.

Those with middling credit scores, defined as 620 to 750, were approved at an 82 percent rate in June.

But those with credit scores under 620 face an entirely different market. Historically, six in ten people who apply for an auto loan with subprime credit are approved.  In June, fewer than one in ten made the cut. Even those who do qualify for a loan often don't qualify for a good one.  Interest rates on many subprime loans are now 10 percent or higher, well above the 6.3 percent average paid by customers with better credit.

Automakers are anxious to sell to those with subprime credit if they can.  Both GM and Chrysler have entered into new partnerships meant to increase the number of loans they can offer to those with credit scores under 620.  But those partnerships haven't yet borne fruit -- we anticipate that it will be just as hard to qualify for a loan in August as it was in June unless something major changes in the economy.

And, ironically, auto loans could play a major role in turning around the economy.  After all, the AP story notes, the auto industry makes up as much as five percent of America's Gross Domestic Product, so freeing up auto sales could make a serious contribution toward reviving the economy.  But for now, sales are held back by the credit markets -- and those in the market for a new car need to polish their credit now more than ever before.

The lesson?  Push your score over 750 and you'll qualify for a great deal.  Over 620, you stand a good chance of a good deal.  Under 620? The market for you now is the worst it's been in years.

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