Financing a car is easy these days, even for 'subprime borrowers'

Staying Ahead

January 15, 1996|By JANE BRYANT QUINN

NEW YORK -- Practically anyone can get auto financing today. And I really mean anyone.

For example, maybe your credit is bad because you once had trouble paying bills. Maybe your past credit is good but you're currently out of work. Maybe you've already borrowed more money than you should. Maybe you went bankrupt last year.

For many lenders, none of this matters. Ten years ago, you might have been poison; now you're merely a "subprime borrower." If you need another car, some auto dealer will probably find you a lender. The business of subprime loans has been exploding. In 1990, just 2.9 percent of all new-car leases and 17.1 percent of purchases went to subprime borrowers, according to CNW Marketing/Research in Bandon, Ore. Last year, that had jumped to 14.3 percent of leases and 22.1 percent of purchases.

As for used cars, 30.5 percent of the vehicles sold by new-car dealers carried subprime loans last year, and 52.8 percent of the vehicles sold from used-car lots.

Some credit unions make subprime loans directly to members. Otherwise, your best source is the auto dealer.

Dealers work with a variety of lenders: banks (which usually lend only to the better risks -- the "prime" credits -- but are starting to tiptoe into the subprime market), finance companies owned by auto manufacturers (which take the cream of the subprime risks) and independent finance companies -- the source of most subprime money today. Some used-car lots take weekly payments from buyers whom no one else will finance.

It's thanks to all this competition that more people can get auto loans. Ten years ago, the poorer subprime risks would have been turned away. The better subprime risks would have paid higher rates of interest than are available today.

Subprime loans cost anywhere from 11 percent, for the better risks, up to your state's usury ceiling, says Randall McCathren, executive vice president of Bank Lease Consultants in Nashville, Tenn. That compares with 7.5 percent to 9.5 percent for prime borrowers.

(The usury ceiling typically ranges from 18 percent to 24 percent, and perhaps higher for used cars, says attorney Thomas Hudson of Venable, Baetjer, Howard & Civiletti. Some states have no ceiling at all.)

The worse your credit, the more you'll pay. Take a used car tagged at $10,000. A buyer with pretty good credit might be able hTC to bargain down the price to $9,000. A subprime borrower, however, might pay full price, and with a high down payment to boot.

What's attracting new lenders is the high profit margin on subprime loans. It costs more to handle these loans -- in debt collection, repossessions and lawsuits. But lenders can charge enough interest to cover these costs with profit to spare.

Several other trends have made auto lenders more willing to consider poor credit risks:

There's the growth in used-car sales -- up almost 20 percent since 1990, according to CNW Marketing/Research. Large volumes of used cars can't be sold unless poorer credit risks are accepted.

There's the shortage of new-car buyers, due to the drop in the number of young adults and the high price of the cars that come off the line. Art Spinella, vice president of CNW, thinks that 2 million to 3 million more cars were sold last year than could have been sold under the tighter credit standards of 1980.

There's the increased number of consumers with poor credit, because of job loss or overuse of credit cards.

There's the growth of credit-scoring -- a sophisticated way of judging credit risks. Lenders have a better handle on who, among those with credit problems, is more likely to pay.

And there's the new willingness of institutional investors to support this market. If you can get only a high-rate auto loan, try to refinance through your bank or credit union after a year or so.

You can write to Jane Bryant Quinn at: Newsweek, 444 Madison Ave., 18th floor, New York, N.Y. 10022.

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