Perfect storm brewing in auto loans
By: Stephen F. Pounds
Tags: Auto Loans, Cars, Financial Crisis, Finance, Car Market Bubble

The decision of how to buy and finance a car has become as complex as picking the correct lane on a multi-ramp interchange.

A wrong choice can put you on the road to Lake Okeechobee instead of Miami (hey, I live in South Florida).

You’ll have a checklist of questions to answer right from the start. Are you buying or leasing? Is the vehicle new or used? Is the loan or lease for 48 or 60 months, or are you pushing the payment period out to 72 months or longer? Will you be going to the dealer or negotiating online?

The plethora of choices can be dizzying.

Fit the car to your budget, not the other way around

First, you must decide on the price range of the car you can afford, how a car loan fits into your monthly budget and when you will make your loan payment during the month.

RATE SEARCH: If you’re replacing your car with one that has more oomph, find a car loan with the best rates today at Bankrate.com.

Some buyers pay for a car with cash, but most of us finance the purchase. The last time I financed an auto deal, my wife and I both bought cars. It wasn’t supposed to be that way. But when she went for a test drive in a Honda Civic, I found myself eyeing an Element that had a special loan offer.

We went for 60-month loans — at the time the exception, not the rule.

If I were buying a car today, I would kick the tires on all the models that I liked in my price range, narrow it to 1 car and take a test drive.

But before negotiating with the dealership’s online sales manager for the best price and the finance manager for a car loan, I’d check with my bank for the best loan rate it could give me.

You’ll have much more flexibility and clout if you bring your own loan to the deal.

Include all the costs of your auto purchase

Matt DeLorenzo, managing editor of Kelley Blue Book, advises car buyers to include taxes, registration and fees, and insurance in the total costs when comparing models and searching for a car.

“That’s the way to make an apples-to-apples comparison,” he says. “And when you’re comparing a buy versus a lease, you have to factor in all of these costs.”

RATE SEARCH: If you’re planning a lengthy vacation and need a new car, research the auto loan rates today at Bankrate.com.

These days, car buyers have so many options. If they can’t afford a new car, a used car might be easier on the budget.

A high school buddy needed a more upscale car to chauffeur clients around but couldn’t afford a new luxury Mercedes or Beemer. Ultimately, he chose a certified-preowned car — a Saab convertible. Very posh.

To be sure, a certified preowned car has significant financial advantages as well. Most are late-model cars that have been inspected, refurbished and certified by the manufacturer. They also usually come with a warranty.

Just make sure the certification is valid.

‘Perfect storm brewing’ in the car market

Dealers have been offering attractive car loans and perks, as the car market has been in growth mode since its low point in 2008. But some observers worry that it has created a bubble.

“Sales have been meeting a lot of pent-up demand, but to sustain the sales level at the 17-million-a-year level, there has been an increase in subprime borrowers,” DeLorenzo says. “There could be a perfect storm brewing.”

RATE SEARCH: Once your credit score is improved, check out the rates on a car loan today at Bankrate.com.

His perfect storm consists of a flood of used cars — returning from leases — becoming available, putting pressure on new-car sales and forcing a round of incentives to buy.

That perfect storm also comes with more subprime borrowers in the new-car market, rising loan delinquency rates and more new vehicle sales containing trade-ins with negative equity.

S&P Global Ratings and Fitch Ratings recently raised the issue of increasing risk in the auto-loan, asset-backed securities market — further evidence of worry.

Can you take advantage of the bubble?

Even so, a bursting car market bubble has much less consequences than the housing bubble popping during the financial crisis. At $1.1 trillion, the auto loan market is much smaller than the $13.8 trillion mortgage market. Still, automakers and dealers shouldn’t ignore it.

If the car market does slow, timing might just be on your side as a car buyer if you have a good credit score.

Pundits have been talking about a possible car-loan bubble for months. If it happens, here’s what you might see, and what’s in it for you.

“The bubble will burst if manufacturers overproduce in the face of slackening sales,” says Kelley Blue Book’s DiFrancesco. “It will actually benefit car buyers who will see more generous discounts, rebates and lease deals.”