US Auto Sales on Road to Next Subprime Bubble

NEW YORK (BankingMyWay) -- Have you been holding off a new-car purchase because you think lenders will turn you down? Well, take heart: Lenders are getting easier on borrowers with less-than-perfect credit.

Experian Automotive, a unit of Experian, the credit-rating firm, reported Tuesday that "loans in the nonprime, subprime and deep-subprime risk tiers accounted for more than one in four new-vehicle loans in [the second quarter] of 2012." That was a 14% increase from the same period a year earlier, and it actually exceeded the rate in the second quarter of 2007, before the financial crisis made lenders tighten their standards.

"Because the overall lending environment has improved, lenders are making loans available to a wider range of customers," said Melinda Zabritski, director of automotive credit for Experian Automotive. "This is good for manufacturers and dealers, as it allows them to sell more vehicles."

Experian said the average new-vehicle buyer borrowed $25,714 in the second quarter, the average used-car borrower $17,433. Both figures were several hundred dollars higher than a year earlier.

Okay, so loans are easier to get. Is it a good time to buy a new car?

For automobile-finance purists, that's a trick question, because they believe it's never a good time to purchase a new car, because used cars are a better buy. Those figures on average loan amounts underscore the obvious: Used cars are cheaper.

Of course, they're used, which means they won't last as long. But today's cars can last an awfully long time. Ten or 15 years of relatively trouble-free service is not uncommon, and that means 150,000 miles, maybe 200,000 or more.

If you buy a three-year-old vehicle, it could be only 20% through its useful life but might sell for 30 or 40% less than when new. That's because the depreciation rate, or pace at which a vehicle loses value, is fastest in the first few years.

Before getting a new car, a buyer with damaged credit should also think of the big picture. Even if a loan is available, the interest rate is likely to be higher than for buyers with better credit, perhaps as much as 7% or 8% higher. That dramatically increases interest charges, especially for borrowers who take out loans for five, six or seven years.

Finally, taking on a new debt can slow the process of repairing your credit, since all debt is considered a risk. The longer you have a low credit rating, the longer you'll pay higher-than-necessary interest rates for credit cards, a mortgage or other loan, and the more likely your loan applications will be turned down.

So, if you have damaged credit, buying a new car should not be on top of the priority list. Keep the old clunker going until your credit is fixed, or buy a good used car, paying cash if you can.

--By Jeff Brown

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