Auto financing is affected by a down economy

A humorous, but fairly true statement regarding the auto purchase market for the past two decades, "if you're breathing, you can get an auto loan" is no longer true.

While a down economy or recession typically brings with it tighter credit (fewer loans, higher credit scores necessary, etc.), current conditions have taken fewer financing options to a new level of elusiveness.

Car makers and auto lenders have both been hurt by the lack of buyers. Typically, manufacturers offer greater incentives and lenders create better loan products to jump start the auto purchase market.

However, pressured by declining (or totally disappearing) profits and sales, combined with the tenuous position of all lenders, it has become difficult to help create a market where one simply no longer exists.

Plagued by increasing numbers of auto loan delinquencies and repossessions, lenders are reluctant to make large loan dollars at reasonable interest rates available.

Can you blame them? When they have increasing volumes of bad loans and reduced income, why should they make credit easier at even lower interest rates?

At the same time, one can't blame people for not spending large sums of money (or signing for expensive auto loans) to purchase new vehicles during this period.

The uncertainty of job security and continued cash flow causes many to postpone, if not cancel, projected new auto purchases. In most cases, they are wise to do so, for a while, at least. Yet, there are still some good choices to finance a new auto if you need or really want one.

Auto financing options guide

Here are the basic auto financing options open to you. Individual terms and interest rates can vary widely depending on your employment situation and credit score.

Assuming your job situation is still constant and your credit report is acceptable, you should be able to compare and choose among the following options:

Dealer-arranged financing

New car dealers typically offer a wide range of financing options to meet the qualifications of most buyers. They often have loans offered by their manufacturer's lending corporation, along with a number of local and national auto lenders, from whom they earn fees for placing loans with them.

Bank and credit union loans

Most banks and credit unions offer a complete menu of auto loans for new, newer, and well-used vehicles. Rates will vary based on your income and credit score. Another factor that affects interest rates and repayment terms is the age of the auto being financed.

The older the vehicle, the higher the interest rate and the shorter the repayment term. While new auto loans may offer up to 100% financing, the loan-to-value (LTV) for used car loans will also be lower, possibly in the 75% to 85% range as a percentage of the auto cost or its retail book value.

Auto leasing

As the prices of new autos escalate, the ability of many purchasers to afford to "own" their new cars has become a problem. Enter the auto lease financing method to save the day for buyers and auto makers alike.

Instead of spreading the total cost over five or six years, you can "rent" the new auto for a reasonable monthly payment. At the end of the lease, typically two to three years, you can a) purchase the auto for a pre-determined price, or b) return the vehicle to the dealer from which you leased it.

"Buy here, pay here" dealer financing

The more reasonable cost for previously owned autos and the scarcity of financing (particularly for buyers with sub-standard credit reports) created this borrowing choice. These dealers offer their own financing, requiring a decent down payment and either weekly or monthly payments.

The interest rate will be higher than bank or credit union loans, but this financing is convenient and may be the best (only?) choice for many purchasers.

Consider your options

These are the primary sources of auto financing currently available. Some dealer (really manufacturer) loan offers have very low – sometimes even zero percent – interest rates. But, remember, these offers are only available for the best borrowers, with credit scores in the 725 to 775 range.

Should you be in the more common 620 to 700 credit score group, you'll have to be content with more available interest rates in the 5% to 8% range. If you choose the lease financing option, you will not have an interest rate, per se.

Since a lease is not a loan, there is no requirement that the lender advise you of the cost of the money you're borrowing.

Be aware, however, that the "imputed" interest rate (actual cost of the borrowed funds) will be higher than a typical auto loan. The convenience, lower monthly payments, and ability to simply return the auto at the end of the lease still makes this option attractive – or at least, workable and affordable.