One of the primary considerations to buy a used or new car is the way in which the purchase will be financed. The recession that struck the United States through the latter part of the last decade saw many lenders tighten up their requirements for financing as more and more people defaulted and missed payments. People were finding it difficult to make complete, on-time payments or were simply defaulting altogether. Thus, a potential borrower with a low credit rating was much less likely to be able to get a loan to buy a new or used car. Subprime borrowers are a fairly significant portion of the total lending market.
This trend is changing with the recovering economy and predicted stability that is forecast for the relatively near future. United States lenders are relaxing the standards for approving an auto loan as the average credit score for new car borrowers continues to drop. The average credit score for auto loans in Q1 was at the same level as Q4 in 2008 at 766.
Subprime borrowers are considered to be those with a credit score below 680. Approximately 42% of borrowers for auto loans to buy a new or used car during the first quarter were subprime borrowers. This number was up from approximately 40.5% during the first quarter of 2010. One of the largest factors in the relaxing of standards is the fact that fewer borrowers are falling behind or defaulting on their loans. On-time payments allow the borrower to positively affect their credit rating making them a more attractive customer to future lenders.
Those individuals that were attempting to secure financing but may have been turned down in the past may have greater success with this shift within the industry. The automotive sector is recovering thanks in part to creative thinking and the government bailout that bolstered manufacturers. New styles of automobiles are either rolling out or will be rolling out of factories in the near future. The relaxed standards will make it easier to secure financing regardless of whether the consumer wants to get into a new or used car. Either way, the consumer, lenders, and manufacturers all benefit from relaxed standards.