For car buyers seeking auto loans, happy days are here again. Banks and auto finance companies are once again welcoming all kinds of customers, even those with less-than-stellar credit.
Low interest rates are making it cheaper for banks to get money, which makes them more willing to lend. The federal funds rate — the rate at which banks lend to each other — is near zero percent, down from 2 percent in summer 2008.
Loans to subprime buyers — buyers with credit scores of 679 or lower — are particularly attractive, since banks can charge higher interest rates. The average interest rate for a deep subprime loan, to someone with a credit score below 550, is 12.9 percent for a new car, compared with 3.2 percent for buyers with the highest scores, according to Experian Automotive.
Yet consumers have cut their debt, meaning that even subprime loans are less risky because borrowers are less likely to be in debt and unable to pay. Just 0.57 percent of auto loans were 60 days delinquent in the first quarter of this year, compared with 0.78 percent in the first quarter of 2009.
‘‘Consumer spending is still very conservative. People aren’t going hog wild like they did before the recession,’’ said Lacey Plache, chief economist for the auto information site Edmunds.com.
Auto loans suffered a similar fate to home mortgages during the financial crisis. When banks sustained losses and tightened lending requirements, the average credit score for new car buyers rose nearly 20 points to a high of 776 in the first quarter of 2010. Standards have been loosening ever since, but only now are they approaching prerecession levels. The average credit score for a new car buyer in the first quarter of this year was 760, while the average score for a used car buyer was 659.
The loosening standards are helping the auto industry, which has seen a steady recovery despite bumpy economic news.
Buyers also have more options. In 2010, General Motors bought AmeriCredit, a Texas company that specializes in subprime lending, because GM’s main finance company was unable to risk taking on subprime buyers. As a result, 8.2 percent of loans for GM vehicles went to subprime customers this spring, nearly double the number in 2010. The industry average is 6 percent.
GM says subprime loans, if managed properly, are good for business. ‘‘The recession created an awful lot of new subprime buyers, but it doesn’t mean they’re a bad credit risk,’’ spokesman Jim Cain said.
Others are sounding the alarm about the easing of standards. On Tuesday, Moody’s warned that the subprime auto lending market is seeing the same kind of heated competition and poor underwriting that drove unexpectedly high losses in the mid-1990s.