Financing a vehicle? You’re not alone—the Federal Reserve found that in 2015, 65.9 percent of auto buyers used a lender of some sort to finance their purchase—andsome interesting facts have arisen from various sources about this segment of the population.
In the Fed’s Report on the Economic Well-Being of U.S. Households in 2015, it is stated that 31 percent of auto loans are made for 61 months or longer. Furthermore, 12 percent of car buyers who used a loan to finance their purchase had a longer repayment period than expected.
Together, those using auto loans from the seller, a financial institution or internet lender, or other means compiled a debt of $1.06 trillion in the last quarter of 2015, according to an analysis from WalletHub. This figure is up more than 11 percent from $0.95 trillion the previous year. Per capita, the auto loan debt balance has risen more than 9 percent, from $3,720 to $4,070.
Subprime lending on the rise
Another staggering statistic is the increase in loan approvals to people with substandard credit. While this is great for the auto industry—and even better for the folks with lower credit scores—it is putting a bit of a scare in the marketplace. And it may not be as beneficial as it initial seems for the borrowers, too.
According to Business Insider, 47 percent of loans in the first half of 2016 went to borrowers with less than a 680 credit score. Additionally, 21 percent of all loans had a loan-to-value (LTV) ratio of more than 120 percent. Drilling down even further, one in eight loans are approved to borrowers who have a credit score of less than 620 and an LTV of more than 100 percent.
“To put this in plain English: Half the loans are going to risky borrowers, and the banks are giving many of them more money than the car itself is worth,” says Matt Turner, deputy executive editor at Business Insider.
Based on those numbers, it’s no surprise that 2 percent of subprime balances became at least 90 days delinquent in the third quarter of 2015, as the New York Times reported. For reference, that figure peaked in 2009 during the depth of the recession at 2.4 percent.
What’s more, those with lower credit scores, and who are therefore considered at higher risk for delinquency, end up paying much more interest—adding to the balance of a loan a borrower already can’t afford to pay.
“Overall, buyers who have fair credit will end up spending about six times more to finance a vehicle than someone with excellent credit, which equates to $6,403 in additional interest payments over the life of a $20K, five-year loan,” writes Wallet Hub senior writer and editor John S Kiernan.
So what does this all mean for you? It’s simple—if you are like most people and want to finance your next vehicle purchase, just be smart and ensure you don’t become one of these subprime statistics.