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2008 Automotive Financing Trends

October 2008, F&I and Showroom - Feature

by Melinda Zabritski

There is no doubt that the automotive finance market is facing dynamic challenges in 2008. Vehicle sales are down, delinquencies are increasing, lending criteria continues to tighten, and lenders leaving the market have left a vacuum that has created a tumultuous lending environment for all.

This month’s quarterly consumer automotive finance report, which analyzes year-over-year trends for the second quarter of 2008, illustrates the continued shifting of credit quality into the higher risk tiers and the increases in consumer delinquency. These increases demonstrate why lenders continue to re-evaluate their programs, and are making it more difficult for high-risk consumers to obtain financing.

Distribution of Automotive Loans by Lending Tier

Despite the decrease in sales this year, there has been a slight year-over-year uptick of 2.1 percent in the number of open automotive loans. However, reviewing the credit quality of those loans also reveals that the number of higher risk loans continues to grow. By the end of the second quarter 2008, the number of open automotive loans outside of the prime market increased 15.08 percent from the same period in 2007.

The only risk tier that did not experience growth was the prime market. While there are still more than 36.4 million (56.52 percent) automotive loans that fall within the prime market, this group experienced a significant year-over-year reduction of 9.2 percent from the second quarter of 2007.

By contrast, the below subprime market realized the most significant increase, growing 28.6 percent to reach 13.41 percent of all open automotive loans. This segment continues to grow and now represents more than 8.6 million automotive loans.

Distribution of Automotive Loans by Segment

As with prior quarters, the market share among the automotive lenders continues to see definite shift s. The segment with the most activity was finance companies. This is not entirely surprising when considering this segment traditionally lends to higher risk consumers, which is the tier that experienced the largest growth in the quarter. By the end of the second quarter, finance companies represented 20.27 percent of all open automotive loans — an increase of 23 percent.

Captive lenders experienced a slight decrease in the number of open automotive loans, declining 2 percent to represent 30 percent of all open automotive loans. However, when reviewing only those loans opened within the second quarter of 2008, the captive lenders represented 25.2 percent of lending.

Year-over-year market share among the banks fell by 10 percent to reach 28.2 percent of open automotive loans. Though this appears to be a significant decrease in share, the overall share of the market for banks has remained relatively flat for the previous four quarters. Similarly, credit unions’ market share has experienced only minor shift s of 1 to 2 percent over the last several quarters.

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