Car Loan Lenders Being Hit By Credit Crisis

May 15, 2008

The effects of the declining housing market is being felt in all aspects of life. Financial markets that may not necessarily have a direct connection to home mortgages are beginning to suffer from the economic stress. Car lenders have started to implement stricter standards before approving loans.

Much in the same way that mortgage brokers are beginning to use tougher standards before approving refinancing or new car loans, the car industry is using the same methods. While a consumer might have been easily approved before, the new car loan methods will disqualify them even if they would have easily qualified for the loan by the old method. One of the biggest changes that consumers will find when seeking a car loan is that most companies now require higher credit scores before approval.

Financial advisors have even found that where the consumer lives can directly affect their chance of receiving a car loan. Generally, consumers who live in states that have seen the hardest hit by the housing slump will find that they just may not receive a loan and if they do the loan will not be as desirable as they wanted.

Sub prime borrowers will have the hardest time receiving a new car loan as they are designated as “high risk”. In the housing market, it is the sub prime borrowers that are defaulting the most on their mortgages, and car lenders do not want to see this trend spill over to them.

Contributing to the stricter standards of car lenders is the decreasing availability of collateral that can be put up to secure the loan. Where consumers used to use their home’s equity to secure the car loan that is simply no longer an option for most.

This year, only about 57% of sub prime borrowers were approved for a car loan. Early last year this number was in the 60 percentile and does not promise to reach that point again any time in 2008.

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