By Kevin Miller

05.30.2008

Subprime auto buyers on both sides of the Atlantic are having increasing difficulty finding vehicle financing. This credit crunch is an indirect result of the subprime mortgage crisis, as lenders are looking much more closely at the qualifications of prospective borrowers, leaving bottom-tier borrowers without financing.

Auto lenders, just like lenders in other sectors, are having a more difficult time to obtain money for loans, and the money they do find comes with higher interest rates. Because the amount of money available to loan has dried up, auto lenders have had to cut back on making new loans. In the past six months, most auto finance companies have increased requirements for borrowers. Among those more stringent loan requirements are mandatory higher down payments, higher monthly payments, and higher credit scores.

Because of the shortage and expense of money to loan, lenders in the US and the UK are not willing to make loans to buyers with poor credit history. Many lenders are scaling back or eliminating loan programs which cater to car buyers with subprime credit. This fact is likely to affect new vehicle sales, as buyers who cannot get financing for a new vehicle are forced to choose older, less-expensive used vehicles.

In recent years when lending standards were less stringent, many vehicle buyers relied on home equity loans to finance vehicle purchases. Devaluation of properties, combined with tightening of lending standards, has eliminated that source of financing for many would-be auto buyers.

The current economic slowdown in the US has resulted in an increased number of vehicle repossessions, as consumers are unable to make their vehicle payments. The large number of repossessions, in addition to the more-stringent lending standards and slowdown in new vehicle sales, has put pressure on the used-car market. In April, sale prices dropped 5.9 percent from a year earlier, with trucks and SUVs falling even more, according to the Manheim Used Vehicle Value index. Prices had been rising for more than four years until last fall. Lower used car values hurt financial groups who handle vehicle leases, as vehicles coming off lease are worth less than their projected residual value at the end of their lease, sometimes costing the lender several thousand dollars (in loss) per vehicle.

The 2008 new vehicle sales forecast for the US predicts sales of around 15 million vehicles this year, which is significantly down from the 16.2 million new vehicles sold in 2007. If that prediction comes true, this will be the slowest year for vehicle sales since 1995. Such a dramatic sales slowdown will have a slowing effect on the overall US economy, as hard times in the auto industry ripple through many sectors of the economy.

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