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As auto sales cool, there are great deals to be had — and worries of a lending bubble

Heather Milne Barger and her husband knew it was about time to replace their 12-year-old Honda Civic hybrid this year — not only because it was showing its age, but because they knew there were bargains to be had.

“There were a lot of deals that dealerships were having, and cheap financing,” said Milne Barger, 44.

Sure enough, when the La Mesa couple bought their new Subaru Outback in February, the dealership knocked $2,300 off the $29,400 list price — and offered them a no-interest loan.

Indeed, there’s rarely been a better time to buy a car or truck.

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Roughly a quarter of that debt is owed by borrowers with subprime credit scores, according to the Federal Reserve Bank of New York and credit bureau Equifax. Although that’s a smaller percentage of overall auto debt than during the run-up to the recession, it’s a record amount. And a growing number are falling behind on their loans.

Two percent of subprime auto loan borrowers were more than 90 days behind — considered seriously delinquent — in the third quarter, up from 1.4% at the end of 2012, according to the New York Fed.

As those borrowers drive up delinquency rates overall, some lenders, especially banks, have tightened their credit standards, requiring higher scores and larger down payments. But others, particularly finance companies that specialize in loans to subprime borrowers, are moving in the opposite direction.

Paul Kerwin, chief financial officer of Westlake Financial Services, a Mid-Wilshire auto lender that specializes in high-interest loans to customers with weak credit, said many of Westlake’s competitors have been too willing to offer risky loans.

Instead of Westlake’s typical loans for $10,000 or $12,000 that are paid off in four years or so, some lenders are offering much larger loans and longer terms.

“When lenders loosen, you get a $20,000 loan and a 72-month term, and now that’s just coming back to bite everyone,” Kerwin said. “A lot of it is putting a customer in too much car.”

In December, the average new car sold for a record $35,309, an increase of nearly $1,000 over the average paid in December 2014, according to auto information provider Kelley Blue Book. The firm cited a sudden shift toward trucks and sport utility vehicles as the key factor driving up prices.

That has given rise to a worrisome trend: Americans are trading in their cars for less than they still owe on their car loans.

Now, they need loans to cover the cost of their new vehicle and the remainder of what they owed.

Ivan Drury, an analyst at Santa Monica car-buying site, found that in the first two months of this year, about 33% of new-car buyers who made a trade-in were underwater, owing an average of $5,195 more than their old vehicle’s trade-in value. That’s the highest percentage and dollar figure on record.

“People who are trading in these cars, they’ll either have to pay off their last car loan on the spot, or they’re going to tack another $5,000 on to a $34,000 car loan,” said Drury, who suspects these customers are indulging desires rather than filling needs. ”You’re seeing some wild behavior.”

There’s an added wrinkle. All these years of new-car sales have dumped millions of vehicles into the used-car market, leading to a steep decline in used-car values.

According to data compiled by, 3-year-old compact cars sold in early 2014 fetched an average of $12,194. In the first two months of this year, 3-year-old compacts were selling for an average of $11,173.

That’s part of what’s pushing carmakers to offer generous incentives on new cars, but it could be a problem for buyers hoping to trade in a car. It’s also problematic for lenders: When borrowers default and lenders repossess and resell their vehicles, lenders can expect to take bigger losses.

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