Car buyers never had an easy time finding a decent car loan if their credit wasn’t up to snuff. But lately, they’re needing more money for a down payment to get into that car and they’re staring at higher rates than many would expect.
Lower income workers have been hit hard during the pandemic as they experience big layoffs at retailers or restaurants. And if they’ve held onto a job, many are clocking far fewer hours under capacity limits designed to halt the spread of the coronavirus.
Many struggling workers are the most likely to be hurt financially by the pandemic, economists say, and the least likely to be able to adjust quickly over time economically.
How struggling households take on debt matters, especially now.
It doesn’t mean that subprime borrowers — those with credit scores in a range between 300 to 600 — can’t get a car loan.
Many, though, must jump through more hoops, as lenders become increasingly concerned about the economic prognosis for the months ahead.
“The loans they are being offered are less attractive and less workable,” said Jonathan Smoke, chief economist for Cox Automotive.
“The terms are shorter, the down payment requirements are larger, and the interest rates are higher, so combine those financial conditions with record high vehicle prices and you get a very unfavorable time to buy,” Smoke said.
In fact, Smoke said, loans to subprime borrowers are down the most of any credit category year to year.
Risky credit means more hurdles in 2020
Deep subprime loans — for borrowers with a 300 to 500 credit score — dropped below 3% in the second quarter, a record low since Experian began publishing the data in 2007.
Deep subprime had been as high as 5.25% of the loan originations in the second quarters of 2008 and 2009.
If you’re struggling but need a car, it’s best to review your options — and look for how to save for a bigger down payment and rebuild your credit score, including paying off some debt on any heavily used credit cards. Make sure you pay your bills on time to help boost your credit score too.
Experian Boost, for example, will allow you to sign up for a program where your Netflix account, phone and utility payments can count toward some limited FICO credit scores. Boost reports only positive payments. See www.experian.com/boost. Not all lenders use the same credit information affected by Experian Boost, however.
Whatever your credit score, it pays to check your credit report at www.annualcreditreport.com to try to clear up any mistakes or issues on your credit report before you shop for a car loan.
You can get free weekly online credit reports now through April 2021, as part of the financial breaks relating to the COVID-19 crisis.
Detroit credit union offers unique help
Some credit unions and others run special programs for credit-challenged consumers, so it can pay to shop around.
The strategy is to help people maintain a job, as many lower-income workers have trouble getting to and from work in metro Detroit without a car.
“It’s a necessity. You need a vehicle to get to work. You need mobility,” said Joumana Mcdad, chief strategy and innovation officer for One Detroit Credit Union.
The credit union has a program for first-time car buyers that offers rates of 8.99% on a car loan regardless of credit score.
The rate can drop to 7.99% for a student with a grade point average of 3.5 or higher — or if the borrower has completed working with a “Life Coach” through the United Way Center for Working Families partnership.
The loan requires a $500 deposit to be held until 12 consecutive payments have been made. Once that requirement is met, the deposit is transferred to a savings account in the member’s name.
The borrower must be employed for 90 days to assist in the underwriting process. No cosigner is required on the loan.
While 8% or 9% for a car loan rate doesn’t sound like a deal when car makers heavily advertised some 0% deals a few months ago, it is a bargain for subprime borrowers.
Mcdad said some car loans can be 17% or higher when someone has a low credit score or a limited credit history. Some predatory car lending at “Buy here, pay here” used car lots can be in the 25% range, she said.
The credit union launched the program in July 2019 and partnered with the United Way Center for Working Families.
The program has made 34 car loans so far, adding up to $465,000 in loans for first-time buyers.
“It wasn’t about making money,” Mcdad said. “It was more about the need in the community.”
She noted that most auto loan borrowers have a steady income and will make their car payments. But first-time buyers often get saddled with an unaffordable interest rate or end up being denied credit altogether.
The average car loan for the credit union’s program is around $13,000 with monthly payments around $240.
The average credit score in the program is 545 and in the subprime camp. Detroit’s average FICO score is 613, as of the first quarter of 2020, which is among the lowest for large cities in the U.S., according to Experian.
Finding the lowest interest rate possible is essential if you have really bad credit.
Someone who has a car loan rate in the 20% range is going to be badly underwater if they need to sell that car in several years. Their monthly payments would mostly be interest and they wouldn’t be building any equity in the vehicle.
“It really is a horrific cycle,” Mcdad said.
How do you steer clear of trouble?
One way to avoid being underwater on a car loan is to consider how much money you really have for a down payment.
If you put only 10% cash down on a car — and you have no trade in value to add to the mix — you’re barely covering the taxes, title and other fees, according to Melinda Zabritski, senior director of automotive financial solutions for Experian.
You could be closer to borrowing 100% of the value of the car or truck than you realize.
She said the interest rate on a car loan is typically higher if a consumer is borrowing a good deal of money on a low priced car or ends up with what’s known as a higher loan to value ratio.
Extending the length of a loan — as is popular to do today — can help you find a more affordable monthly payment, Zabritski said.
But you’re at a greater risk of owing more on the car loan than what the car is worth when you need to buy another car or truck down the line.
The average term for a new car was 71.54 months in the second quarter of 2020 — up from 67.97 for the same quarter five years ago, according to Experian’s data.
The average used car loan was 65.3 months, again edging upward.
Even someone with good credit might not build any equity in the car for roughly three years if you’ve taken out a six-year car loan, depending on the popularity of the make and model.
Don’t only dwell on the monthly payment. Review the interest rate you’re being charged.
All the low rates being talked about today do not apply to everyone.
Let’s take a glimpse at some used car loan data. The average rate paid by risky borrowers who fall into the deep subprime category was 20.93% for a 72-month used car loan taken out in the second quarter of 2020, according to Experian’s data. It has risen slightly from the average 20.31% for used cars for the same time a year ago.
By contrast, the average rate paid for a used car loan fell in the past year for borrowers with excellent credit scores. Borrowers in the super prime category saw average rates of 4% for 72-month used car loans taken out in the second quarter of 2020, according to Experian. The average fell significantly from 4.88% for the same time a year ago.
Subprime borrowers may not be locked out of car loans, but they’re not getting the deals that many other car borrowers are seeing in 2020.
Car loan rates, again in general, remain favorable in 2020.
If you have a good credit score, the best car loan rates are in the 2% range, such as 2.69% to 2.99%, according to Bankrate.com. Those car loan rates can be had with credit scores of 700 or better.
Banks and credit unions aren’t offering 0% rates but some manufacturers continue to offer a few here and there to those with great credit on select models. In general, many 0% deals now are targeted to move older models, including some 2019 models, according to Cox Automotive. It’s a very different landscape from April when 0% blanketed much of the industry. Now, it’s rare to see 0% for 84-month car loans.
General Motors, for example, is offering 0% APR financing for 60 months on the 2020 Cadillac XT4, XT5 and XT6. Ford Motor has a 0% for 60 months on 2020MY Fusion (gas), Escape (gas), Edge, Explorer and Expedition, with $1,000 trade assistance cash on the SUVs listed. Incentives vary by region and vehicle.
The average rate for a four-year used car loan is 4.96% — down from 5.33% at the beginning of the year, according to Bankrate.com.
The average for the five-year new car rate is 4.24% — down from 4.60% at the beginning of the year.
The fact that subprime lending was down in the second quarter shouldn’t be too surprising, given the pandemic.
“Between stay-at-home orders and fluctuating financial situations, the reality is that subprime consumers may not be in-market for a vehicle right now,” Zabritski wrote in a blog.
“The situation continues to be dynamic, which is something that lenders and dealers need to keep in mind and define strategies accordingly.”
The latest data on subprime car loans, Zabritski said, follows a trend that began five years ago when subprime auto loan originations began declining steadily.
Back in 2014, car sales were fueled by a big increase in lending to risky borrowers, so much so that federal banking regulators raised concerns about that surge. Making too many subprime loans can drive up the risk that a financial institution is lending to borrowers who cannot afford to keep up car payments — driving up defaults and harming consumers, as well as banks.
The stronger economy in recent years — before COVID-19 hit — could have meant that fewer auto buyers might fall into the subprime tiers, given an emphasis on improving one’s credit and a stronger jobs picture in recent years, Zabritski said.
And the economic fallout from fighting the coronavirus may mean that fewer households with low scores could have been shopping for cars, she said.
As for the forecast, the unemployment picture will clearly influence what’s available to borrowers with lower credit scores in 2021.
ATLANTA _ Many Black entrepreneurs struggle to get bank loans and professional help to launch new businesses. A new program aims to remove those stumbling blocks.
An Atlanta nonprofit and another business have committed $150 million to the 1 Million Black Businesses effort, which will make loans and provide financial and business advice to Black-owned startups and established small businesses. Atlanta-based nonprofit Operation Hope, which helps consumers improve credit scores, is kicking in $20 million, and Shopify, the online e-commerce is adding another $130 million for the loans and website-hosting services.
Other services firms providing expertise or help include Aprio, an Atlanta-based accounting firm, and First Horizon Bank.
It’s a package of products that many Black entrepreneurs couldn’t get through a bank or credit union, said John Hope Bryant, CEO of Operation Hope.
“A bank won’t lend you money unless you can prove that you don’t need it,” Bryant said. “That’s especially true with minority-owned small businesses.”
Small businesses with Black owners were half as likely to obtain business loans as whites, according to a Federal Reserve survey published earlier this year.
The initiative is the latest effort to help Black consumers and businesses enter the financial mainstream. Earlier this month, a group that includes rapper Killer Mike opened a digital bank aimed at Black and Latino consumers.
Banks and credit unions have tried for years to help Black consumers open checking and savings accounts. The efforts helped, as the number of U.S. households without bank accounts fell to 5.4% in 2019 from 6.5% in 2017, the Federal Deposit Insurance Corp. said Monday.
Consumers who own checking and savings accounts typically have access loans with better rates and a wider variety of financial services.
The federal government’s $660 billion loan initiative for businesses hit by COVID-19, the Paycheck Protection Program, also helped few Black-owned businesses, Bryant said. PPP loans were based on a company’s number of employees and its rent obligations. many Black-owned small businesses typically didn’t have enough workers to qualify and are based out of the owner’s residence.
Bryant said a bad credit history may not prevent applicants from receiving a loan.
He hopes more companies will contribute services such as insurance advice or software typically available only to well-established businesses.
Bryant noted that 1MBB is not a charitable organization, as participating companies like Shopify will likely get a pipeline of new business customers through the program.
“This is not pure philanthropy,” he said. “Shopify believes that Black-owned businesses are good businesses if they’re properly supported.”
The final days of October offer a chance to take advantage of outstanding model year-end deals. Most offers end November 2, which means there isn’t much time left to enjoy this month’s best lease deals and deepest new car discounts. We even found incentives that can help those with bad credit buy a new or used car.
Why are small cars bad to lease? Even though smaller cars typically come with lower price tags, that isn’t always the case when leasing. A mix of lower discounts, worse residual values, and smaller discounts can actually make a Nissan Altima cheaper than a Versa despite having an almost $10,000 difference in MSRP.
Shorter-mileage leases. More brands are offering shorter mileage allowances on car leases. Although this is typically used to offer consumers more flexibility, we’ve found cases in which you can end up getting less for your money. If you don’t read all the fine print, this could make comparison-shopping difficult.
$0 down leases. If you’re adamant about now putting down any money on a lease, you’ll love Sign & Drive leases. In addition to requiring no money down, $0 down lease deals can cover your first month’s payment. Even hot sellers like the Honda CR-V Hybrid offer $0 down and as little as $330/month on a lease.
JACKSONVILLE, Fla. – No matter if they’re bad or good, credit scores affect everyone’s lives.
Still, for many people, by the time they’ve learned the importance of having good credit, it may be too late.
“If you’ve had late payments, it would take 24 months of on-time payments to rectify the situation,” Jax Federal Credit Union Interim President Mary Svoboda said.
Svoboda said paying someone who claims they can fix your credit quickly is a waste of money.
“It can cost you several hundred dollars, and you can do it yourself,” she said.
Svoboda says those quick-fix businesses check your credit report for discrepancies and then dispute them. She explains how you can do it on your own instead.
“Check your credit report,” she said. “If there is something, it’s very easy to dispute it directly with the lender or through the online process with the credit bureaus. So you don’t need to pay for that.”
If there is any silver lining from the coronavirus pandemic, it is that all three major credit bureaus — Experian, Equifax, and Transunion — allow anyone to check their credit every week without any penalties. Before, you could only do that three times a year.
“The credit report would be linked up to your bank account and through your bank account they could see you have regular deposits and you pay your utility bill and your mobile bill on time, things like that,” she said.
Svoboda said some of the most common pitfalls she sees when it comes to credit is people have too many credit cards. She said that should be avoided when you start building credit.
“Sometimes it’s horrible, you see people that have 20 or 30 credit cards, so that is not a good idea,” she said.
That should all be avoided when you start building credit.
If you want to build credit but need some help living within your means, Svoboda recommends getting what’s called a secured credit card. It’s like a debit card in that you can only spend what’s in your account. But unlike a debit card, a secured credit card builds credit.
What if you’re taking steps to fix your credit but can’t wait and need a loan now?
“Right now, what I would encourage someone to do is if you don’t really have any credit, bring me your bank statements and show me, ‘Look at this. I have made a $600 rent payment for the first of the month for a year.’ I’ll say, ‘Let’s do this loan,’” Svoboda said.
While you’re rebuilding your credit score, Svoboda says you should care about it, make it important, and check it. Because a bad credit score doesn’t have to be a life sentence.
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