How a Recession Can Affect Your Auto Loan Application

Your auto loan application will be evaluated with the conditions of the market in mind. This means, no matter how good your credit is, your car loan approval will be subject to the lender's current financial strength. In a recession, lenders typically suffer greatly because there is a high rate of default on their existing loans. When the lender is not as financially strong, your application will need to be much more appealing in order to get both financing approval and good loan terms.

Less Cash on the Market

Banks and lenders need to have cash on reserve in order to lend it to you, the consumer. When the economy is slow, the money these organizations plan on having in reserve does not come in. This is partially due to loan defaults; both businesses and personal borrowers default at higher rates in a recession. Banks and lenders also invest money in the stock market and other investments, often through mutual funds and small investment groups. As the stock market drops in a recession, the lenders lose this money.

Your loan application will be considered against many other applications. Because the lender has less money to distribute, you will be in direct competition with other borrowers for a smaller amount of loans. This means your application will need to stand out. Your credit score is a good way to set yourself apart; a good credit score is the first step to being an appealing borrower. A high, stable income, a low amount of debt and other factors will also be considered. 

Lower Appetite for Risk

Lenders make risky loans when the economy is strong. A good example of this occurring was in the early 2000s, when banks issued a lot of jumbo loans and sub-prime loans. Jumbo loans allowed borrowers to get a mortgage much bigger than the federal maximum. Sub-prime loans allowed borrowers to get loans under the federal prime interest rate. When the real estate and stock markets began to fail, it was obvious the lender's risks did not pay off.

The result of these risks backfiring is a lower overall appetite for risk. Banks and lenders are more likely to opt for secured loans to borrowers, both business and personal, with very strong financial profiles. Those companies and households with low credit scores or other other risk factors will have a particularly hard time getting a loan in a recession.

Affect on Interest Rates

Interest rates are subject to forces that work both ways in a recession. First, the national prime interest rate comes down. This means the amount that banks charge one another for borrowing is low. Those savings could be passed on to you. Further, auto dealers offer incentives for lower interest rates if you finance directly through them. Auto dealers suffer in a recession, and they will offer great deals as a result.

Even though lenders are borrowing from one another at a lower rate, though, this does not mean they will pass on the savings. The lower appetite for risk will often make loans more expensive after a recession regardless of the lower national interest rate.



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