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Auto Loan Lending Booms Due to Perfect Storm

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According to a recent Experian report, the nation’s auto loan balance has reached a new peak of $782.9 billion. This is an increase of $103 billion from 2012.

This increase is music to lenders’ ears, but it also shows that dealers have reached new record sales.

With consumers once again eager to purchase vehicles, even if they have to borrow car loans to do so, America just may be finally out of the slow recovery that has been burdening the economy since the recession.

Gary Miller, Business Head of car loan lender LightStream, said that the car loan market only grew because auto sales were high.

“New car sales also create used car inventory, which further adds to the strong demand for financing,” he said. “The latest statistics show that there are over $800 billion in outstanding auto loans.”

The recent car buying boom has not gone unnoticed at LightStream, where auto loan lending has been particularly strong over recent months. This is partly due to buyers becoming savvier in their approach to getting auto loans. With more alternatives available online, buyers have more chances to save time and money. However, due to the financial differences between different generations, buyers have not been represented across all age groups.

“Young clients don’t usually have the credit history to qualify [and] senior clients typically have fewer credit needs,” said Miller.

Even though different generations have varying levels of purchasing power, demand for new vehicles is shared by virtually all car drivers who do not own the latest models.

Joe Pendergast, Associate Vice President of Consumer Lending at Navy Federal Credit Union, said that pent-up demand and low interest rates are two prime reasons that auto buying increased this year.

“Many consumers who held onto their vehicles during the recession are feeling better about their finances and are looking to buy,” he said. “We expect this to continue into 2014.”

Navy Federal Credit Union noticed that as the economy has improved, so too have quality credit scores. This increase in credit scores means that more people can qualify for financing that they otherwise would not have been able to receive.

While individual credit scores are an important part of the new car buying and auto loan borrowing peak, car makers have also had a role to play.

Brad Sowers, General Manager at the Jim Butler Auto Group, said that a “perfect storm” is raging in automotive sales due in part to car makers.

“It starts with the fact that cars are built much better than ever before, so they do last longer,” he said. “On top of that, many people were reluctant to purchase a new car during the Great Recession. This has driven the average age of the car on our roads today to 11.4 years. This is the oldest age we’ve ever seen.”

Sowers continued to explain that many of these cars have over 160,000 miles on them but with the economy starting to pick up and interest rates being low, drivers are understandably eager to get new vehicles.

“There are simply no reasons holding people back from buying a great new car at a great price and rate,” said Sowers.

Part of the auto loan and car buying boom is made up of subprime consumers finally buying vehicles. Even the Jim Butler Auto Group has noticed a marked increased in subprime auto loans over the past two years.

The reasons for the uptick in subprime auto loan lending is due to car manufacturer financing, which has become noticeably generous.

“The car manufacturers’ financing divisions have been much more aggressive in providing good loans to Americans with lower credit scores,” said Sowers. “These deals make great sense for the customer, they get a well-made new car with a warranty for a payment that is often below what they were paying for an older used car without a warranty.”

An estimated 10 percent of the monthly new car sales sold by the Jim Butler Auto Group are paid for with subprime auto loans, signifying their sizable role in monthly car purchases as part of the car buying boom.