The world is awash in oil which has caused oil prices to take a nose from a record high. Cheap oil prices could mean more savings for U.S. households, and could justify getting a new car — even if your credit history suggests that it’s going to get you into trouble.
Unfortunately, that has been the story for many of the car loan borrowers last year. Earlier this year, a report from Experian found out that Americans racked up a massive amount of auto loan debt in 2015. Care to know how much it is? It’s $987 billion, or 11.4 percent more than n 2014.
The report also noted an increase in subprime auto lending, from 20.3 percent in 2014 to 20.8 percent in 2015.
What is subprime lending and what does this increase mean?
Subprime lending means making loans to borrowers who may have difficulty in paying back and have a higher chance of default. Examples are individuals who have bad credit scores. Their credit scores tell creditors that it’s going to be risky business.
In exchange, however, subprime lenders offer loan rates that are higher than those who qualify for prime rate loans.
The increase in subprime lending may have been a factor in the spike in delinquency of car loans. According to Experian, the number of car loan borrowers who had serious delinquency (60 days or more behind) increased from 0.72 percent in 2014 to 0.77 in 2015. In other words, there was in increase in the number of borrowers who had fallen behind their car loan payments.
The increase in subprime lending suggests that creditors are slowly opening their gates to borrowers who had bad credit. The bottom cutoff for a credit score to be considered “good” is 660; below that is considered “bad.” And in 2015, massive car loans went to people with poor credit.
Good or bad for you? It could be both.
If you have bad credit but badly want a car, then maybe it’s a good time to try your luck.
However, simply wanting a car, or thinking that it makes sense to get one because oil prices are at the bottom is not enough. Doing so might just make you another statistic reported by Experian on delinquent car loan borrowers.
Think twice. Deciding whether to get a new car should be based on your objective financial situation, not on the excitement that owning a car gives you.
A lot of us rush into getting a car loan and driving that shiny baby home without really taking stock of where we are financially. Later, we find ourselves stuck on a loan we can no longer pay. What gave us excitement and happiness at the start is now giving us headaches and sleepless nights.
If you have bad credit today, take the necessary steps to improve it. If you make improvements, then it suggests you are doing better at handling your finances. Once you’ve mastered it, then maybe it’s time to revisit that car loan you’ve always wanted to get.