October brought another monthly improvement in buyers’ ability to access auto loans, according to the Dealertrack Credit Availability Index. Credit access, or the ability to gain approval for a loan or lease, climbed for the sixth consecutive month in October, reaching its highest level since April 2015. Kelley Blue Book’s parent company, Cox Automotive, publishes the index.
Still, overall affordability remains a challenge, with new car prices at a record high.
While it’s encouraging to see continued improvement in credit access for buyers, October’s gain was the smallest of the six-month streak. Longer loan terms, subprime loans (loans for borrowers with lower credit scores), and other factors contributed to the slowdown.
Despite those headwinds, loan approval rates climbed to 73.9% in October, vs. 71.5% a year earlier. Auto loan terms also improved last month, with the number of 72-month and longer loans dropping from September’s record highs. Buyers’ down payments improved in October, climbing to 13%, though negative equity (owing more than the car is worth) remained a problem in the used market.
What does all of this mean for people shopping for a car? On the surface, it would seem that easier loan approvals are a good thing, but there is good reason to approach this with caution.
Better access to credit can make a vehicle purchase easier and less impactful on your budget up front, but it can lead to higher expenses down the road. Interest rates and fees make the loans more expensive over time, and they also make it more difficult to sell or trade in later on. Extending your loan term can make the monthly payments less stressful, but you could end up paying for that car well beyond its warranty period. In that case, it will take a lot longer for the loan amount to catch up with the vehicle’s depreciation, meaning you’re more likely to owe more than your car is worth.
We also need to discuss vehicle pricing, which remains a significant challenge for many buyers. The new vehicle average transaction price reached a record $51,109 in October, putting some purchases out of reach for mid-market buyers. Easier access to credit can’t overcome that hurdle in all cases, and even when it does, the monthly payments can be unaffordable for less-affluent buyers.
If you’re in the market for a new or used car, it’s a good idea to shop around for the best prices and loan terms. Prices haven’t climbed as fast for some vehicle segments, including midsize SUVs and subcompact SUVs, so it’s possible to find a deal outside of the most popular segments. Take your time reading loan documents to understand your rates, terms, and any fees or service charges.
