How a Struggling Economy Affects Car Loan Lending

Car loan lending is directly tied into the health of the national credit markets. During a recession, the credit markets suffer because there are many people defaulting on their loans. The defaulted loans leave lenders without a steady source of payments and very little cash to provide for new loans. In a bad economy, the problem extends to both businesses and personal loans for borrowers. When you are seeking a car loan in a recession, understand the impact of the economy at large on your personal loan.

Less Money Available

As businesses fail, they do not pay off their high cost loans to major lenders. Subsequently, they lay off employees and those employees do not pay their loans. The credit market that suffers the most includes mortgages, credit card bills and student loans. The end result is less cash in the hands of the lenders. When lenders do not have cash available, they do not have the funds available to lend to consumers.  

As a result, many lenders begin to “tighten” their credit standards. “Tightening guidelines” means a lender will begin to ask for larger down payments, higher credit scores, reduced loan amounts and increase rates. Some consumers will be able to secure loans, but high risk borrowers will be the most affected by the lack of loans on the market. 

Lower Appetite for Risk

In a recession, banks lose a lot of money and are not willing to take on additional risk. Most lenders begin to lose their appetite for risk. If you are a high risk borrower, either because of your credit score, your lack of employment, or other factors, you will find it especially difficult to secure a loan.

 In order to appear more appealing to the lender, you can attempt to secure the loan against an asset. With a car loan, consider using the car itself. This will allow you to accept some of the risk of the loan and make the lender more comfortable working with you.

Interest Rate Changes

The national prime rate is typically lowered in a recession to curb inflation and encourage lending. Although that sometimes means that rates will be lower across the board, banks and lenders are usually very cautious about low-cost loans. You may see higher interest rates on some types of loans, such as personal loans and unsecured loans.

Dealer Incentives

People cut spending during a recession. They particularly stop making large purchases, such as vehicle purchases because they fear they may lose their job and not have enough savings. With the credit markets slow, and buyers afraid to purchase cars, car dealers take a bad hit in a recession.

Dealers attempt to counteract this trend by offering large incentives to purchase a car. You may be able to get a car at dealer-invoice, thousands of dollars lower than you would normally receive at retail price. If you can secure a loan at a good rate, a recession can be a good time to buy a car and capitalize on these incentives.

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