Loans for new vehicles next bubble to burst?

You know the economy is bad when a house given away for free by ABC’s “Extreme Makeover: Home Edition” is headed for foreclosure. While we hear a lot about the mortgage mess, there’s also big trouble afoot in the auto loan industry.

Turns out, Detroit’s Big Three want out of the car leasing business. Chrysler announced it first, then three days later, both Ford and General Motors leaked word that they, too, were backing away from leasing. This is a sea change in auto buying.

Since the early 1990s, leases have allowed consumers to take possession, albeit temporarily, of cars they couldn’t afford to buy. Automakers were thrilled because leases allowed them to expand the pool of potential buyers; created constant demand for new cars; and they were hugely profitable. After charging someone rent on the car for a couple of years, the automakers would take the car back and sell it used for a hefty profit.

Until this week, leases accounted for 20 percent of new car sales for the Big Three automakers. For now, buyers will still be able to make lease arrangements through third-party creditors, but lenders such as Chase and Wells Fargo seem to be turning away from leases, too.

What’s going on? A few things, all at once.

First, gas prices. Economic events always ripple outward, and $4 gas creates a lot of ripples. One has been the collapse of demand for new trucks and SUVs. The price of used full-size SUVs is down 27 percent; used pickups are down 25 percent. Leases are only profitable if the company can resell the car. Ford has reported $2.1 billion in lease losses; GM holds some $33 billion in lease assets.

The entire financing side of the auto industry is shaky. Delinquencies are at their highest levels since 1992.

The good news is that the auto loan market has stabilized.And unlike in the housing market, irresponsible lending and borrowing shouldn’t affect more responsible consumers. Of course it’s the indirect effects that’ll kill you.

The national credit crunch isn’t just squeezing the housing market, it’s also making auto loans more difficult.

Lenders are tightening their standards for car loans and that means bigger down payments and monthly installments. Some buyers looking for new mid-sized sedans are settling for used compact cars and others cannot even afford those.

CitiGroup, one of the nation’s biggest financial firms, has cut about 800 jobs in its auto lending business and says it plans to scale back the number of loans it offers.

People with decent credit aren’t able to get the terms they think they should get.  Many companies are requiring larger down payments than before and is limiting terms to six years for buyers with lower credit scores.

Bill Miller, a Cleveland State University student who works full-time as a mechanical engineer, said he tried to buy a car a few months ago and couldn’t get credit anywhere.

Miller’s status as a college student with a C-minus credit rating and some credit card debt told him getting a loan would be a challenge, but he didn’t think $7,000 for a used car would be out of line for him and his girlfriend.

“We were declined and declined and declined. I thought I rebuilt my credit, at least to the point of getting a car loan,” Miller said. “I guess not.”

Scott McKown, finance and insurance director for the Classic Auto Group in Mentor, said competition among lenders as recently as last year allowed dealerships to sell cars to people who typically couldn’t afford them.

“In a lot of cases, we’d say, ‘Boy, I hope the customer can pay this,’” McKown said. “These guys tended to specialize in that low end of the business.”

The loan squeeze could lead to lower sales in a year that has been one of the worst in a decade. As with the collapse of the mortgage business, lenders blame the tightening of auto credit terms on Wall Street.

Until this year, high-volume lenders would package their auto loans and sell them to investors, who would make their money from borrowers’ interest payments.

But with the collapse of the mortgage market, investors no longer are snapping up loans, especially those to buyers with questionable credit.

Even Ford Motor Credit, General Motors Acceptance Corp. and other lenders affiliated with automakers say they’re looking a little harder at each transaction. But those companies tend to stick to the best borrowers, so dealers said the effect of those changes has been minimal.

“When you have dealers that say they can get anybody a loan, they’re selling financing,” said Pat O’Brien, owner of Chevrolet dealerships in Medina, Willoughby and Westlake. “They’re not selling the car.”

We all want auto loans that are free of all hassles and charge the lowest interest rates, right? If you, too, are on the lookout for such auto loans, the best place to find them is online. There are a host of websites offering lots of online options of auto loans to choose from. Now you don’t even need to visit a bank or a credit union to get your loan.

With reputed companies like E-Loan and Capital One Auto Finance (Formerly PeopleFirst) providing online auto loans, more and more companies, banks, and credit unions are now offering auto loans over the web. Now, many of the major banks, namely, Chase Manhattan, Wachovia, Wells Fargo, SunTrust, PNC Bank, and Union Bank of California are offering online auto loans. But all these offers of auto loans available on the net differ a lot from each other in terms of online applications, rates, and customer service. Thus, one needs to be careful while shopping for a loan.

The best part about these online auto loans is there low interest rates. On an average, auto loans for new cars are available at 7.54% for a period of 48 months and auto loans for used cars are available at 8.04% for 36 months. But when you shop for the same loans online, you get to see a marked difference. Online auto loans for new cars are available at 4.05%, while for old cars it’s 4.59%.

You can also get auto loans at these amazing rates. All you need to do is to apply online, and agree to make automatic, electronic loan payments. Instead of online application, if you apply for auto loans by phone, fax, or mail, then the interest rate increases around quarter percent. If you don’t agree to the automated loan payments, then your interest rate goes up another half percent.

But all online auto loans don’t guarantee low interest rates. There are several banks that offer their online customers the same interest rate on auto loans that they offer at the branch. So, simply logging on to the Internet doesn’t mean that you’re getting the lowest interest rates on auto loans. Apart from the low interest rates, what endears online auto loans the most is the quick response time. You can get an approval within minutes of applying for a loan.

Also, while applying online for auto loans, don’t overlook the fees. Various types of fees, such as application fees, paperwork fees, administrative fees, and many other fees, may be charged for auto loans. So make sure that you clarify about the types of fees to be charged before you apply for a loan.

You have to be careful that instead of saving money with online application for auto loans, you don’t end up paying more through various hidden costs. The best way to ensure that is to take some time off to shop around for the various types of auto loans available, there interest rates, as well as terms and conditions.

Visit all the websites that you can, and find out what all do they have to offer to a person having your credit score. After all, getting a quick approval for your loan is not the only factor. What really matters is the interest rate, and it won’t leave you any happier if you have to pay a few hundred dollars extra to get a quick approval.

In fact, there are several websites that don’t approve your loan instantly. They may take several hours, or even days, to process your application. They will go through your application thoroughly and verify all the details before reaching any decision.

So let me suggest you the best way out. Take enough time to shop around for auto loans. You might check out some offline options as well. Once you’ve gathered enough information, compare the interest rates and other details, and get going!