It is harder to get a credit card than an auto loan when the two types of loans are subject to different lending terms, standards and regulation. Additionally, auto loans and credit card loans can vary enough to make credit card loans prone to more lending risk than auto loans. Since lending risk is correlated with loan availability, a higher lending risk for credit cards makes it harder to get a credit card than an auto loan. It is not always the case that credit cards are harder to obtain the auto loans, for example with borrowers who have excellent credit. For the times where it is harder to get a credit card than an auto loan, the following are contributing factors.
• Collateral
Auto loans are collateralized by the vehicle they are lending money for. If the loan goes into default, the vehicle can be repossessed.. Although this does not eliminate all financial risk for the lender, it does reduce it. Unsecured credit cards do not have the same asset protection for financial institutions, and the lower the credit score of the borrower, the higher the risk associated with lending to them. Thus, under these conditions, it is more likely an auto loan borrower may have a greater chance of receiving an auto loan than a credit card for the same amount.
• Title
Another financial security feature available to auto loan lenders is withholding of title. This can also make it easier to get a car loan than a credit card. For example, if someone buys a car with dealer financing, a condition of purchase may be that the dealership retain title of the vehicle until a certain amount of payment has been made on the vehicle. By retaining title to the vehicle, the financier or dealership protects itself from legal issues pertaining to the reacquisition of the automobile should the borrower default on their payments. Title loans are another type of collateralized lending that charge high rates of interest and provide collateral to the lender thereby lowering the risk and increasing the incentive for making the loan.
• Regulation
It can be harder to get a credit card than an auto loan because of regulation as well. Although all types of lending are subject to similar and in some cases the same federal regulations, some of the stipulations within financial regulations that apply to credit cards make it harder for credit card lenders to hedge risk with fee and agreement terms modification. For example, the Credit Card Act of 2009 initiated several rules that limited credit card companies ability to acquire profit through billing cycle methodology, charging of fees and raising of interest rates.
• Financing
Vehicle financing is also quite diverse as automobiles are often directly linked to the application for financing whereas credit card purchases are not. In other words, the auto loan is just for an automobile whereas a credit card is not. This makes negotiating lending terms and agreement easier because there is less uncertainty about the nature of the purchase. Since auto loans can be financed via a dealer network, the policy regarding lending may also be different than with a financial institution as the dealership is acting as a broker. Moreover, brokers acting as independent agents may more easily approve loans via dealership policy.
Sources:
1. http://bit.ly/aQ2h9y (Federal Trade Commission)
2. http://bit.ly/6NYgoQ (FTC Credit Card Lending)
3. http://bit.ly/YosTc (White House)
4. http://bit.ly/dnkH9A (Federal Deposit Insurance Corporation)
5. http://bit.ly/cry9oe (FDIC: Auto Lending)