"People have had a very serious financial wake-up call," said Gail Cunningham, vice president for public relations of the National Foundation for Credit Counseling (NFCC). "Now they are getting a little more financial stability. They are on more solid ground."
In effect, lenders have met consumers halfway: After seeing many clean up their acts, they are now ready to grant them higher credit card limits, bigger loans and lower interest rates. Ravi Shanker, an auto analyst with investment bank Morgan Stanley, recently told Automotive News that "credit quality is rising quickly and is near historic highs." This in turn will lead to more lending for vehicle purchases.
Some consumers with absolutely lackluster credit histories might even be able to get a car loan soon. According to Experian Automotive, a research arm of the Experian credit rating agency, subprime loans were already on the rise over much of 2010.
Consumers Shape Up
This could mark the beginning of the end of one of the grimmest periods of consumer lending in U.S. history. Two years ago, in one of the first effects of the financial meltdown, car lending virtually dried up, bringing U.S. automakers to their knees. Even consumers with relatively good records saw their access to credit curtailed. And for months, banks restricted much of their auto lending to the higher tiers of borrowers. But now they have come to the realization that they can't make money if they continue to cherry-pick the most attractive customers, according to Cunningham and other analysts.
To some degree, consumers themselves turned the market around. They paid down their debts, improved their record for on-time payments, and increased their rates of saving. They apparently made millions of New Year's resolutions at the start of 2009 and 2010 – and kept them. In the process, they became better candidates for loans. For example, 8 million consumers "stopped actively using bank-issued, general purpose credit cards over the past year," according to the ratings agency TransUnion. That tended to lower their debt overall and increase the lines of credit available to them.
In another positive sign, auto loan delinquencies were down about 28 percent in July, August and September of this year, compared to the same period of 2009. That was partly because banks were lending to higher-quality borrowers. But the trend is even expected to continue in 2011 as credit loosens up. TransUnion predicts that the car loan delinquency rate will decline slightly in 2011, falling from 0.62 percent to 0.6 percent. That's "well below" the 0.86 percent rate in the fourth quarter of 2008, the company noted.
As a result, banks are warming to lending again, even in the lower credit-score ranges. According to Experian, the current average for a new car buyer is 769 on its 990 point scale, down six points from a year ago. "Lenders have relaxed their standards," Cunningham said. "They have to – they are in the business of lending money."
Credit-Challenged No Longer
While lending is still "somewhat tight, everything that I'm hearing is that the restrictions are going to be loosening up," said Gary Pierce, national accounts director for lendingtreeautos.com, the online loan broker.
In the process, lenders may have to add even more borrowers with less-than-perfect credit to their portfolios. Overall, Experian said the share of new vehicle loans to "credit-challenged" shoppers has climbed 12.7 percent in the third quarter of this year. The biggest increase was in the so-called "nonprime" group with credit scores ranging from 620 to 679, according to Experian.
Lenders are ready to give a higher priority to auto loans, too, and "earmark more funds for auto loans compared to previous years," Pierce said. Car.com and LendingTree, for example, have institutions competing for customers with good, bad and indifferent credit.
On average, lenders are already making larger loans than a year ago. For example, the average new vehicle loan during the third quarter 2009 was about $22,700, compared to about $25,300 for the same period this year, Experian said.
Interest rates remain low. Lendingtreeautos.com says they start at 3 to 4 percent for buyers with a high credit score -- still the inescapable yardstick even as conditions improve.
But as credit eases, many consumers are likely to embrace their inner shoppers and resume spending to excess, Cunningham says. According to the NSCC survey, about half the people who cut back on their spending recently say they'll lapse back to old habits once their finances improve -- and credit card companies will be helping them. The market research firm Synovate USA says financial institutions sent out more than 600 million card offers in the second quarter of 2010. That's an 83 percent increase compared to the same period the year earlier.
Fortunately, many other consumers indicate that they'll stick to their new-found conservatism, according to the NSCC survey, and they may balance out their more spendthrift neighbors.
In fact, Cunningham believes spending is coming back more slowly than it did after past downturns.
From the standpoint of personal finance, "it's the recession's silver lining," she said.