The personal finance market has noticeably tightened as a result of economic and fiscal outlooks becoming more uncertain. When financial markets experience this level of turbulence and uncertainty it tends to have an impact on your ability to get the loan you want.
Getting an auto loan, for instance, has become more challenging in recent times. That’s especially the case when your credit score is not as perfect as you would like it to be. However, if you search for bad credit auto loans guaranteed approval, for instance, there is always a solution where you can find a deal to turn your motoring ambitions into a reality.
There is still the question of why it has become such a struggle to get an auto loan. Let’s take a look at what’s behind the current lending issues and how it is impacting loan approvals going forward.
The perfect storm
When analyzing the cause of a problem it often is a number of key issues that combine to make the perfect storm. This is the case when it comes to the auto loan market.
The pandemic seemed to create pent up demand for used cars. At the same time you also had a high degree of geopolitical uncertainty and volatility. This demand for motors highlighted a shortage of available vehicles. That brought supply and demand economics into play, meaning that used car prices soared as demand outstripped supply.
At the same time, the economic outlook was making lenders more nervous. What you ended up with was a scenario where cars became more expensive and loans became harder to come by. That made finding the right level of affordable financing more challenging than usual.
Lending criteria has tightened
The bottom line, as highlighted above, is that it has become tougher to obtain a car loan simply because it is more challenging to get a car.
The state of the economy added to the difficulties in getting an auto loan. Basically, lenders are generally cautious about who they lend to, even when economic conditions are more positive.
When you have a scenario where the state of the economy is less stable and more uncertain, that makes lenders rein in their lending and tighten their qualifying criteria.
They typically display that caution by either offering a lower amount of money, causing you to find a bigger down payment, or they hike their loan rates to reflect a more cautious approach.
Vehicle originations are lower
The pandemic drew a line in the sand when it came to manufacturing output. If you look at a typical quarter, such as the last one of 2022, you will see that there were 6.6 million originations. That is noticeably lower than the same comparable quarter the previous year, which saw 7.3 million originations.
This data from Transunion makes interesting reading. Especially when you consider that auto loans for subprime borrowers didn’t fall anywhere near as much as prime borrowing numbers.
What this data is telling us is that more people fell into the subprime category due to a change in their financial circumstances and a definite tightening of lending criteria. Many of us still need to buy a car, even if the rate is not as attractive as we want, which explains why bad credit loans have held up so well in a declining finance market.
Changes to loan criteria
A good way of looking at what’s going on in the auto loan market would be to appreciate that the financial landscape is much the same for lenders and borrowers. Both sides are impacted by changes in market conditions.
In much the same way as consumers have had to rein in their spending and think more carefully about what they spend, you can see that lenders have also had to squeeze their spending and lending habits as a result of the increased costs and risks of lending.
What this all means is that it is currently harder to get an auto loan than it was a few years ago. A drop of about 2.5% in the number of auto loans being approved tells a story. It is saying that we are witnessing a combination of some consumers putting off taking a finance deal for longer together with more lenders rejecting loan applications than in the past.
What we are also seeing with this changing lending landscape is an adjustment to lending criteria and borrowers looking for different deals to get the finance they want.
It is now more common for an auto loan to be over a longer term so that the monthly repayment stays as low as possible. For those that can afford it, putting down a bigger deposit is also a good way of keeping the monthly payment low.
Finding a viable solution
If you have a less than perfect credit score it’s likely that this will result in a higher rate of interest to reflect the perceived risk of lending in those circumstances. Although paying more for your auto loan under those conditions is inevitable there will be some things you can do to improve the rate and terms.
A good tactic is always to shop around and compare rates. Once you have several quotes to compare against each other you will be able to go for the offer with the most competitive rate.
You could also see if it is possible to add a co-signer. This can be helpful if your credit score is lower than ideal. If the co-signer, who is accepting joint responsibility for paying back the loan in the event of a default, has a good credit score, this can really help bring the rate down lower.
Getting an auto loan has become more of a struggle than in previous years, but that doesn’t mean you can’t still find a deal that is as competitive as possible, even in difficult circumstances.
As long as you have a good understanding of how auto loans work and what lenders are looking for at the moment there is always going to be a deal available that can help get you motoring.
