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Lenders Take Their Foot Off The Brake On Auto Loans

If you’re thinking of buying a shiny new ride, your chances of getting a loan are looking pretty rosy.  Since the financial crisis of 2008-2009 turned off the money tap, banks have been stingy when it comes to doling out money to borrowers.  They’re still throwing up stop signs when it comes to home mortgages and business loans, but they’re giving the green light to car loans in increasing numbers.  A federal survey backs up the trend, reporting that 20% of banks participating in a recent study say they eased restrictions on auto loans, while only 3% loosened up on home mortgages and 11% on credit cards.

The credit reporting agency Experian says that the number of car loans in the U.S. rose by 5.7% last quarter, the biggest increase since 2009.  Even sub-prime auto loans issued to borrowers with low credit scores are on the rise.

Why are banks more likely to give you a loan for a car than a house?  One reason is the term of the loan, which is three to six years for a car versus up to thirty years for a home mortgage. The rational is that the shorter the loan, the less likely the borrower is to default.  Another reason that lenders are favoring auto loans is that people are more likely to skip mortgage payments than car payments because cars are easier to repossess than a house.

The total car loan figure hit $725 billion at the end of June, giving a boost to the auto industry, one of the few business sectors that’s doing well in our struggling economy.  The figure reflects an 8.7% increase in auto sales, versus a 5.9% rise in all other retail sales groups during the first half of 2012. The average auto loan rate with a five year term was 4.4% at the beginning of August.

The burgeoning numbers of auto loans ripples over to Wall Street, where they’re bundled into securities and sold to investors. It’s looking like auto loan securities will double this year, given that they’ve already totaled $50 billion in the first half of 2012 and the total amount for last year was $53 billion.

All of the above spells good news for people looking to finance a shiny new road machine. New hybrid Lexus, anyone?