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Taking on Today’s Tightening Market

June 2008, F&I and Showroom - Feature

by Eric Lindeen - Also by this author

There is no denying that the credit market has changed or that many lenders seem to be tightening their offerings. The question is, "What strategies can lenders and dealers utilize to maintain their volume in this turbulent market?" The answer depends on where you sit in the market. The good news is that options are available and help is coming.

New Vehicle Financing

For new-vehicle sales, the news is much better than for used-vehicle sales. Most manufacturers' finance arms see their mission as unchanged — help consumers buy their brand of car. For dealers who have shunned captive finance systems for being slow, cumbersome or uncompetitive, the time has come to re-evaluate.

At the American Financial Services Association Vehicle Financing Show in February, there was a lot of discussion about maintaining sales volume. Stephen Smith, an executive at American Honda Finance, commented at the show, "We're not going to slow consumers down. We're here to help dealers sell cars." In fact, most captive lenders seem committed to holding their ground through the turbulence, and ensuring that consumers are able to find financing.

Some captive lenders are also working to improve their offerings in the subprime space. George Borst, president and CEO of Toyota Financial Services, noted, "We've added improved analytics at the low end of the credit scale, using more data to make decisions. We've added 84-month financing for tier 1 and 2 consumers, so there is positive news at the high end, not just negative [news]."

A 2007 study by J.D. Power and Associates found that 20 percent of customers leasing or financing new cars had poor credit. Because some captive lenders, such as GMAC Financial Services, Ford Motor Credit, National City and FirstMerit, have long limited their exposure in subprime, financers are unlikely to see much restriction from these lenders since they weren’t heavily exposed to riskier loans.

In response to a question about turmoil, Michael Bannister, CEO of Ford Motor Credit Company, said the company's lending practices have been consistent over the last five years. "We are watching the credit landscape evolve with interest, but don’t plan any changes," he explained.

Pre-Owned Vehicles

The news on the used-auto side is less cheery. For years, subprime consumers have found it easier to buy a new vehicle at two to three times the cost. This trend seems to be amplified as lenders pull back support for subprime lending. While captives may be willing to absorb some of the risk in new-vehicle loans, many consumers still need a more affordable vehicle.

Daniel Berce, AmeriCredit's president and CEO, explained that the company began shrinking its subprime business toward the end of 2007, with an eye toward a 30-percent reduction in 2008. Still, he expressed optimism that the market would hold.

"In mortgage, people were buying second homes on speculation," he said. "People don’t buy used cars on speculation."

Lending experts concur that the risk associated with subprime auto is dramatically less than subprime mortgage loans.

By way of contrast, Chase Auto Finance CEO Marc Sheinbaum said he expected a pull back on periphery loans with less down, higher loan-to-value (LTV) ratios and longer terms. This may impact some subprime consumers, but he seemed optimistic about the business. His final comment should encourage every dealer and F&I department to keep Chase on the short list.

"We are seeing paper today that we didn't get before, so someone must be cutting back, but it's not us," he said.

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