Any way you look at it, 2008 was a really bad year for auto sales. How bad? Well, in 2007, 16.1 million cars and light trucks were sold in the U.S., and even though it was less than the year before, times were still pretty good.
But in 2008, the bottom fell out of the car-buying market and only 10.4 million vehicles were sold. It was the heart of the Great Recession, and everybody in the automotive business was feeling the pain.
A lot has changed in the last few years, and sales have rebounded. Bloomberg reports that if sales continue at their current pace, 2012 will be the best year for the industry since 2007. Sales may reach 14.2 million units, thanks in large part to factors like a slowly improving economy and easier credit.
That's great news for a lot of people, including car buyers, dealers and manufacturers, not to mention all of the subsidiary industries and small businesses that feed into and off of the larger car manufacturers. But what if you've been turned down for a loan? What do you do now?
Auto lending is all about your credit history and score. If you've got a great FICO score, perhaps north of 780, then you'll qualify for one of those attractive offers you see on TV with really low teaser interest rates. A new car with a 60-month loan and a FICO Score in the range of 720 to 850 gets you an auto loan with a 3.5 percent APR. If you're in the 660 to 689 range, you're looking at a loan with a much-higher 6.75 percent APR. And if you're at the very bottom of the subprime lending range, with a FICO Score of 500 to 589, you'll pay nearly 15 percent interest on your car loan.
And what happens if you don't have any traditional credit history, or not enough to calculate a credit score (referred to in the biz as a “thin file”)? Well, you're SOL at the typical auto dealer. You can't buy a car if you can't get a loan, which leaves you historically with only one choice: Stop by your neighborhood “Buy Here Pay Here” (BHPH) auto dealer, and one way or another, they'll probably get you into a car.
It won't be a new car, and it will have lots of miles on it, and it may need a new transmission the day after you drive it off the lot, but at least you'll get a car you desperately need to get you to and fro.
Consumers who purchase from BHPH auto dealers fall into that huge crevice between subprime auto lending and not getting any auto loan at all. The BHPH dealer won't want to talk to you about interest rates. What's to negotiate? The interest rates can legally go as high as 36 percent. (Where I live in Georgia, the maximum interest rate allowed is only 28 percent). Instead, your local BHPH will focus on your expected monthly payment and ask for a really big down payment. It's a terrible way to buy a car, but for millions of Americans, it is the only way they can make this significant a purchase. (Not that it will help their credit rating, since BHPH places rarely report positive news to credit reporting agencies, but they'll be quick to report a missed payment, default or repossession.)
There is another option, however -- one that fits nicely between the BHPH dealer and the subprime lending rate, but potentially offers an interest rate far better than the deep subprime lending rate.
If you can prove your creditworthiness by having your routine, everyday bills verified on your behalf, there are some companies that are working with alternative credit scoring companies to offer credit. The rates these sites offer are not typically as low as the lowest teaser rates you see from car dealers, but they do make credit available to traditionally underserved populations. (Full Disclosure: eCredable provides alternative credit reports to a site called RoadLoans.com, which provides auto loans carrying an interest rate between 11.99 and 17.99 percent.) Other companies are CoreLogic, Clarity Services, and PRBC. If you can earn the best alternative credit rating based on the way you pay your bills today, you get the better rate. If you don't have a top rate, you pay a higher interest rate, but you'll likely still be miles ahead versus going to a BHPH dealer.
You can go to any dealer and buy the car you really want instead of being stuck with the inventory on the BHPH lot. If you can afford the payments, you can buy a new car that's under warranty and has no mileage on the odometer. If you can continue to work on your credit and improve your credit score, you can even refinance your RoadLoan.com car loan down the road.
The potential savings is staggering. Imagine you purchased a $15,000 car with a five-year loan carrying a 28 percent interest rate. Your monthly payments would be $467.04 per month. But if you qualified for a loan at 17.99 percent, your monthly payments would be just $380.82, a savings of $86.22 per month, or $5,173.20 over five years. And if you qualified for a car loan at 11.99 percent, your monthly payments would drop to 333.59, a savings of $133.45 per month, or just over $8,000 in five years.
That kind of savings goes a long way on a typical family's $52,000 median income, and it opens up car buying opportunities across the spectrum -- which is good for millions of Americans and good for our economy as well. Use of alternative credit data by a large number of lenders is still in its infancy, but growing every day. As more and more lenders adopt the use of this information in their automated lending software platforms, more access will provided to the 25% of the adult population without a traditional credit history.
This story is an Op/Ed contribution to Credit.com and does not represent the views of the company or its affiliates.
Steve Ely is the CEO of eCredable, a Credit Reporting Agency based in Alpharetta, Georgia. Prior to that, he was President of Equifax Personal Information Solutions.
