http://www.sltrib.com/sltrib/money/50125049-79/loans-auto-credit-loan.html.csp

Consumers loans harder to come by, except those for autos


By LESLEY MITCHELL



The Salt Lake Tribune



Updated 1 hour ago Updated Aug 17, 2010 04:38PM

It’s more difficult — impossible for some — to get a home loan or refinance these days. Ditto for credit cards. And small business loans? Don’t even consider applying for one unless you have a financial house in order.



But auto loans? Not so much. Bad credit, bad credit — it seems like most people these days are still able to finance the purchase of an automobile.



“It’s amazing just how the auto loan industry has relaxed their lending standards, even in just the last 90 days,” said Al Bingham, the Utah author of The Road to 850,” a book about the nation’s credit scoring system.



The goal, of course, is to move cars off lots at a time when many consumers can’t — or don’t want to — make a major purchase.



That’s why General Motors recently agreed to purchase AmeriCredit, a provider of subprime loans made to borrowers with less than perfect credit. Analysts say the acquisition could boost the automaker’s sales by 10 percent to 20 percent a year by giving the carmaker broader control over auto-loan approvals, especially to those with less than good credit.



So why has subprime car lending continued long after subprime home loans have virtually disappeared amid the housing crisis?



For starters, auto loans to those with less than perfect credit don’t carry the risk to lenders than high-risk mortgages do. Customers pay exorbitant interest rates — in some cases pushing 30 percent — and cars can be repossessed fairly quickly and easily if borrowers stop paying. Seizing a home is a much more time-consuming and expensive process.



And many borrowers remain highly committed to their car loans and will stop paying on their credit cards and other debts — even on their mortgages — before they stop paying the loan that gives them a way to get to work or anywhere else the need to go.



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But there are signs of trouble in the auto lending industry. Auto loan defaults rose sharply in July by 16 percent from June, according to a report released last week by Standard & Poor’s and credit-reporting company Experian.



While mortgage loan and credit card default rates fell slightly, rates for second mortgages and auto loans rose. The default rate on auto loans in particular increased to 1.9 percent in July from 1.6 percent in June, reversing six months of declines.



“It may be an early warning sign, “ said David M. Blitzer, a Managing Director at Standard & Poor’s.



The problem for many car dealers right now, Bingham said, is that the people who can truly afford to buy a car right now don’t want to buy. Many people are holding on to cars longer and delaying vehicle purchases.



But there are a number of borrowers who need a car or want to buy one even if they aren’t in good shape financially.



Since the economy has tanked, the federal government has been pushing incentives for consumers to buy homes, cars and other items — and encouraging financial services companies to lend — in an effort to stimulate the economy.



But credit experts like Bingham aren’t sure that subprime auto loan ultimately are good for consumers — or the economy as a whole. “Is a 20 percent interest rate going to help someone, or make their financial situation worse?” he asks. Plus, a rash of auto-loan defaults down the line could hinder the nation’s economic recovery.



But Craig Bickmore of the New Car Dealers of Utah said it’s important to note that the car-loan industry didn’t bring on the financial crisis and that default rates on vehicle loans overall are much lower than default rates on other types of loans.