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Falling credit approvals for care leases not necessarily a bad thing?

October 7, 2016
The number of people being turned down for automobile leases due to poor credit has been growing since the beginning of the year and hit its highest point in August, according to a company that tracks that market, even though lending institutions have loosened up credit standards in recent years for car leases and purchases.
 
The credit approval rate of 57.7 percent for car leases in August was the lowest rate seen in 2016 and the lowest for an August in the past two years, reported Swapalease.com, a Cincinnati-based company that matches people who want out of their existing contract with shoppers looking to take over a short-term lease. By comparison, the approval rate for August 2015 reached 85.7 percent.
Still, car sales and demand for leases have been strong in recent years, and even the recent slip in credit approvals may not be a setback. Industry players say that may reflect the rising number of overall applications, which is considered a sign of an improving economy.
 
"Leasing has become more popular," said Scot Hall, executive vice president of Swapalease.com. "But lease transfer credit approval is maybe a half-step more difficult than a typical lease because banks want to manage their portfolio risk and they will often compare the credit of the original borrower to the prospective borrower’s credit."
 
Banks could decline a prospective borrower for a lease transfer simply because his or her credit is not as good as the current borrower’s, Hall said.
 
Gus Faucher, the deputy chief economist at PNC Bank, said more people are applying for credit to lease and purchase cars because the economy is on the rise and consumers feel comfortable enough to get into the market for a car.
Faucher said the Federal Reserve periodically interviews bank credit officers and releases a report called the Senior Credit Officer Opinion Survey. The most recent report shows demand for car loans has increased every quarter since 2011.
 
"What we’ve also seen is lending institutions have relaxed their lending standards, generally," Faucher said.
"What’s going on is we have more people looking to get a car loan or a lease. But bank standards haven’t fallen as dramatically (as the demand for credit is rising), which is why some people are having difficulty getting a lease even though standards are relaxed from the recession years.
 
"Everything looks good in terms of car sales, overall," he said. "We are adding jobs, wages are rising, consumers got a big benefit from lower gas prices and interest rates are low."
 
One financial planner said he typically advises clients to buy rather than lease new cars. 
 
"The longer you own your car, the more you’ll save buying versus leasing," said David Walters, with Palisades Hudson Financial Group in Portland, Oregon. Also it costs less to own an older car, which depreciates more slowly than a late-model car.
 
Interest rates are usually higher on leases than car loans. According to WalletHub’s recent survey of car manufacturers’ financing arms, auto dealers charge 1.45 percent on average 36-month car loans versus 4.58 percent APR for leases.
 
Hall said 31 of every 100 new car sales last year was a lease, which is a record high. He said consumers are drawn to car leases because of the low expense involved in driving newer cars.
 
 

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