The auto lending sector witnessing a downturn over the past few years. As a result, some of the largest banks of the nation has revised their lending terms on the basis of the assets. They have decided to stop lending to some of the major auto dealers unless they offer a minimum of 25% collateral for the loans.
According to the internal memo seen and the source from Reuters, the central banks has tightened the auto lending terms significantly for the auto dealerships. This is done specially to reduce the exposure of the loans to risks especially when this specific loan sector is experiencing a sharp downturn.
This restriction comes at the wake of the shadow banking crisis that has affected several countries of the world and the automobile sector when it comes to lending. This has had significant effects on the industry on the whole such as:
- It has resulted in the liquidity crunch in the non-bank auto financing sector
- It has also resulted in a higher insurance cost
- It has raised the taxation and
- It has significantly increased the pressure on the auto sector with the monthly auto sales volumes dropping by 17 to 20%.
When it comes to the sales of passenger vehicles, it has witnessed the biggest drop in the decade. In one specific internal memo for financing the auto dealers, the banks have revised the lending terms simply because they want to reduce the growing stress in the portfolio of the manufacturers.
There are lots of similar memos that have also been sent to other small and large auto dealerships across all brands and models of cars, though the Reuters cannot confirm that they have seen such memos sent to the other car manufacturers.
In addition to that, the dealers who want to receive loans from the from the bank will also need to provide security or collateral between 25% and 50% of the loan amount they want to take. In fact, all supply chain financing has also followed suit.
Auto financing and options
There are different options for auto financing that you may choose from according to your need.
- Direct lending: This is the form of a loan that you take directly from the bank or financial institutions. The loan amount is paid to the dealerships by the bank and you make the monthly payments according to the agreed rate of interest and within the loan tenure.
- Dealership financing: This is specific type of auto lending that is most popular. The dealers arrange for the loan for the vehicle that you want to buy. They have long standing relationship with the banks and several other lending institutions dealing with auto lending such as https://www.libertylending.com/ and others.
The loan tenure is usually spread over 12 to 60 months. In most of the cases, when you want to take out an auto loan, you will need to put down a deposit of 10% at the minimum.
All these loans are usually secured against the vehicle. This means the lenders are at a lower risk while making these loans. It also means that the car is technically and legally not yours until you make the last payment and get the letter of clearance or No Objection Certificate from the lender.
What to look for
The Federal Trade Commission says that when you look for an auto loan you should look for the best ones.
- For this you will have to shop around a bit and make a proper comparison of different loan options before you make a decision.
- It also warns that you should consider offers from different dealers and several sources of financing such as the banks, the credit unions, and different finance companies.
- Look for the lease terms and rate of interest that best suits you along with the vehicle type that you want to purchase. Never go overboard and choose anything that you cannot afford to continue paying for the entire period of the loan.
In addition to that, you must also consider the running costs so that you eventually get the best deal on auto financing.
Sometimes, you should also consider whether or not you should pay it outright, especially when the interest rates on your deposits are very low. Since your savings will not earn you much it is better to use it to pay some or all of the amount of your new car. This will save you from the hassles of saving and borrowing at a rate of interest that is much higher.
However, if you are considering paying your new car outright there are a few things that you should care for as well:
- It is important to make sure that you have enough money in your savings account left over so that you can meet with any emergency needs after buying the new car.
- If you do not have enough money in your savings account you should not choose for buying the car outright. Instead you will be better off with an auto loan taken out by putting down a larger deposit.
Lastly, if you have very high limit on your credit card, you can use it to buy your car as well. However, to prevent your financial health from any risks you should make sure that you have enough resources to pay off the balance in full the next month. The good thing about using your credit card is that you will get credit card purchase protection. Sometimes, few credit cards issuing company may also allow you to change your loan balance plan and pay it off in a few Equated Monthly Instalments or EMIs.
To sum up
If you want to have the best auto lending option and not face the effects of tightening the lending policies of the banks, you should keep a checklist handy. The list must include:
- Your affordability to pay the monthly installments
- Comparing the Annual Percentage Rate
- The deposit amount required and you can afford to make
- The running cost of the loan
- The total cost of borrowing.
Also ask about the early repayment cost and other charges.