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Why it's a great time to buy a car
This is when your credit record matters. You have great scores? Car loans are cheap, and carmakers are eager to deal. Bad scores? You'll pay and pay.

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E-mail to a friendTools IndexPrint-friendly versionSite MapArticle IndexDiscuss in a Message BoardDigg This By Liz Pulliam Weston
If you plan to get a car loan this year, you'll find a tale of two markets:

Folks with untarnished credit will find good rates, eager lenders and some amazing deals as increasingly desperate car manufacturers try to revive sagging sales.

Folks with troubled credit will find higher rates, increased scrutiny and warier lenders, but they won't face anything like the trouble they'd experience if they were shopping for a mortgage.

As the credit crunch has spread through lending markets, some pundits have proposed that auto loans could be the scene of the next subprime implosion. The idea is that loose lending standards combined with increasingly strapped borrowers could lead to a spike in defaults and a crackdown by lenders, making it tougher for consumers -- especially those with troubled credit -- to get new loans.

That's certainly what's happened among mortgage and home equity lenders, as I wrote in "A homebuyer's market? Hardly" and "Lenders cut off the home-equity tap."

And you don't have to look far for ominous signs in auto lending. Until now, auto lenders moved vehicles off the dealer lots by:

Stretching out loan terms. As I wrote in "The real reason you're broke," more than 80% of car loans are for terms longer than four years. The average loan term has grown from just under 55 months in 1990 to more than 64 months today. Longer loans allow consumers to buy more-expensive cars but virtually ensure that they pay more interest and stay "underwater" on the loan (owing more than the vehicle is worth) for years.

Approving bigger loans. The average amount financed in December was $29,062, up 20% from the 2005 average of $24,133. Median household incomes barely grew at all during the same period.

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Encouraging "upside down" owners to roll negative equity into new loans. Haven't finished paying off your last car? No problem. Dealerships are so eager to sell you another one, they encourage you to roll your debt into a new loan, putting you further upside down. Roughly one out of four -- 26.3% -- cars that are financed include debt rolled over from a previous vehicle, according to vehicle research site Edmunds.com. In February, Edmunds said, the average amount of negative equity in these deals was $4,369. These loans cost consumers more because interest rates are higher to reflect the fact that a good chunk of the loan is unsecured. They also put lenders at risk because whatever they cleared from a repossession wouldn't repay the loan.

Reaching out to borrowers with more-troubled credit. To make more loans, auto lending experts say, mainstream lenders began approving loans for people with increasingly blotched credit reports. Interest rates for these folks were often 10 percentage points higher, or more, than for those with good credit to reflect the extra risks of default.

It's bad but not that bad
In an economic slowdown, you'd expect all these factors to contribute to a higher default rate. And they have.

Standard & Poor's reported in January that delinquencies on auto loans sold to investors were climbing across the board, including on loans made to people with the best credit. (Loans made to folks with so-called prime credit, defined in the auto industry as FICO scores of 680 and above, represent about 70% of all auto loans.)

The number of prime loans that were more than 30 days overdue was up 18%, Standard & Poor's analysts said, and had exceeded the previous high reached in 2001, during a recession.

The numbers could get worse, the analysts warned, because of the housing mess. Prime borrowers were more likely than subprime ones to be homeowners and thus affected by mortgages with resetting payments.

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More delinquent auto loans?

A new report from Lehman Bros. predicts there will be an increase in auto loan delinquencies, and CNBCs Phil LeBeau has the details.

Scary, right? Except the higher delinquency rate the analysts are warning about is 2.06%, compared with 1.75% on earlier loans.

Delinquency rates for loans made to folks with "nonprime" credit (FICO scores of 620 to 680) are still under 5%, while 30-day delinquencies for subprime credit (FICOs under 620) are under 8%, S&P figures show. Higher than in the past, yes, but still below 2001 rates.

Although some industry experts are predicting more defaults and repossessions this year, "it's still peanuts," said Ralph Ebersole, the director of automotive consulting for Cars.com. "It's not like things were in the last real recession, in '91 and '92."

Aim is not just to finance but to sell
Even if defaults do skyrocket, it's hard to imagine the auto lending market seizing up the way the mortgage market has. Auto lending differs from mortgage lending in many ways: The amounts at risk are much lower, for one thing, and the bulk of loans are made by lenders that have a vested interest in encouraging sales.

These lenders, called captive finance companies, are arms of the car manufacturers: GMAC, Ford Motor Credit, American Honda Finance, Toyota Motor Credit, etc