All Revved Up With No Place to Borrow

he era of easy auto loans has come skidding to a halt.

Mortgages were among the first consumer products to be hit by the credit-market freeze. Now car loans and leases are drying up as dealers, auto-finance companies and other lenders are having trouble finding money to lend to car buyers. The upshot: Those with less-than-stellar credit are getting shut out of loans, and even some so-called prime borrowers are having trouble getting financing.

"You have to just about be walking on water to get financed," says Mike Jackson, chief executive of AutoNation Inc., the largest U.S. chain of dealerships. He added that the subprime market is "basically almost closed" but "even with our prime customers, banks are looking for a reason to say no."

AutoNation dealerships sold 532,862 light-duty cars and trucks last year, and this year, amid the credit crunch, that number could fall by as much as 20%, Mr. Jackson says.

For shoppers with good credit, financing is still usually available, especially among healthier foreign auto makers like Toyota Motor Corp. and luxury companies like BMW AG. But overall, financial institutions have become less likely to lend.

Credit unions and so-called captive-finance companies -- the lending arms of major auto makers -- are likely to offer the best chance of getting a loan. Paying down outstanding debt to boost your credit score could also help. And car shoppers should consider turning to the used-vehicle market if they can't get financed, or at least settle for a less-expensive car.

These days, though, even the used-car market can be hard to negotiate. Laura Ryan-Day of Austin, Texas, says she was rejected four times by Wells Fargo & Co. for a loan on a 2006 Honda Element, even though she has no credit-card debt and rents her home, and her credit score is above the national average. Her income as a psychotherapist has been consistently high, she says, and she earned an additional $30,000 last year after she started her own practice.

After she found the car, Ms. Ryan-Day, 32 years old, thought getting a $13,500 loan through Wells Fargo, where she has her checking, savings and two credit-card accounts, would be a snap. "I've had friends take out loans before for a bigger amount with much less hassle," she says.

Ms. Ryan-Day says that Wells Fargo's initial denial stemmed from confusion over her tax returns, which the bank said hadn't been filed. After she found the forms and resubmitted, the bank offered a series of objections to her income and expenses related to her new practice, she says.

Then, nearly two weeks after first applying for the loan, she received a call from Wells Fargo Financial, a subprime unit of the institution. She was quickly approved for a 12.24% APR loan for $14,500, after taxes and fees.

"I really needed the car," says Ms. Ryan-Day. "What else was I going to do?" She hopes to pay the loan off in six months.

"We work hard to ensure the best pricing for our customers while managing risk for the company," a Wells Fargo spokesman says. "Beyond that, we do not comment on customer relationships because they are confidential."

As of Sept. 20, about 64% of auto-loan applications were getting approved, down from 83% during the same period last year, according to CNW Marketing Research Inc., a research firm based in Bandon, Ore. Subprime-application approvals suffered a dramatic drop, falling to about 23% from 67% a year ago, but even near-prime and prime approvals fell somewhat.

When they do get a loan, car shoppers are likely to get less cash from lenders, requiring them to put more money down to borrow -- sometimes 10% to 20% of a car's value. The average down payment on a roughly five-year auto loan in August was $3,067, up from $2,435 a year earlier, according to Edmunds.com, an auto-research firm. It's only the second time the figure has exceeded $3,000 in nearly four years.

J.P. Morgan Chase & Co.'s Chase Auto Finance unit is asking buyers for higher down payments and more documentation for loans, a spokeswoman says. Other standards implemented in the past year or so: no subprime loans longer than 72 months and capping all new-vehicle loans at 84 months.

Americredit Corp., a big subprime auto lender, expected to originate about $10 billion in loans between July 2007 and June 2008, but fell short. It now expects to originate about $3 billion for the year ending in June 2009, a spokeswoman says. The firm recently reached a financing deal with Wachovia Corp. for auto-asset-backed security notes it expects to issue in the future. Customers can expect interest rates on Americredit car loans to be two percentage points higher than a year ago, a spokeswoman says.

Customers used to leasing their vehicles will also have to grapple with a tougher financing environment. Detroit's auto makers have scaled back leasing amid big losses on SUVs, which they relied on more than their foreign competitors. Chrysler has stopped leasing altogether.

One piece of good news: With car sales plunging across the industry, you should be able to at least nab a good price. Overall, U.S. sales of light-duty cars and trucks were down 26.6% in September from a year earlier, according to Autodata Corp., a research firm in Woodcliff Lake, N.J. The best deals are being offered by General Motors Corp., Ford Motor Co. and Chrysler LLC, whose sales have suffered the most.

GM's employee-discount program ended last month, but the auto maker plans to offer discounts of up to $7,000 on some models, the company said Wednesday.

A 2008 Ford Edge with all-wheel drive, meanwhile, can be had for a little bit more than $23,500 in many areas after $3,000 cash back, or customers can get 0% financing for 60 months. Even a 2009 Toyota Camry, among the best-selling cars in the U.S., has modest cash-back offers or 0% financing deals in some regions.

Here are a few tips that could increase your chances of getting a new car -- and the financing needed to pay for it:

Negotiate a better price. To get the best price on a new car, you can email dealers for quotes through Web sites such as Edmunds.com and Kelley Blue Book's www.kbb.com. Dealership sales managers know they're competing with other dealer quotes this way and are more likely to give you the lowest price possible.

Do your homework on lenders. Before visiting a dealership, try to get pre-approved for loans at a nearby bank or through Internet lenders such as E-Loan Inc. You'll know whether you can get a loan, and what the terms should look like. Then try to get the dealer to match or beat those terms.

Auto makers' captive-finance arms and credit unions are likely to offer you the best terms. Captive lenders are under pressure to sell vehicles for their parent companies, though Detroit's finance arms have become more discriminating in recent months amid the credit crunch. Credit unions, meanwhile, are in a better financial position these days than larger banks, and will often consider many factors with a customer beyond the litmus-test FICO score.

Improve your credit. Walking into a dealership with a FICO score in the upper 600s to 700 will make your car shopping a lot easier. Check your credit report -- available free from the three credit bureaus at AnnualCreditReport.com -- for mistakes that could inadvertently lower your score. Pay down debt, especially credit cards. The more maxed-out your credit line is, the more potential for a negative impact on your credit. And, of course, try to come up with a bigger down payment -- the more you put down, the easier it is to get a loan.

Shop the used-car market. Average used-vehicle prices at auction were $9,430 in August, compared with $9,775 a year earlier, according to Manheim Consulting, an Atlanta firm that runs dealer auctions nationwide. Dealers often don't mark these vehicles up significantly. Fuel-thirsty full-size SUVs are auctioning for about $10,500, according to Manheim, 23% lower than a year ago. More efficient entry-level midsize and compact cars are auctioning for about $7,700 and $8,500, respectively.

As bad as the car-loan market is right now, it could get worse -- meaning that waiting too long to buy could be perilous. The federal bailout isn't likely to make car-loan conditions better in the short-term, as financial institutions are apt to be careful with any new infusion of capital, says Rich Kwas, a Wachovia auto analyst.

"Right now I think it's certainly tough, and I think it just gets tougher before it gets better," he says.