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Subprime Approvals Up, But Off Pre-Recession Pace

August 24, 2012

BANDON, Ore. — Loan-to-value ratios are climbing, especially for subprime borrowers, CNW Research reported this week. The firm’s data for the first-half of 2012 showed that LTVs continue to climb, but remain a long way from returning to pre-recession levels.

CNW’s Art Spinella wrote in his “Retail Summary Report” for August that banks are chasing after auto loans because of low repossession rates and because consumers continue to make their payments on time.

“In the heyday of subprime lending, those with the lowest acceptable FICO score had LTV ratios in the near-100 percent range. As the recession deepened, banks were requiring larger down payments across the board,” he added. “Even prime borrowers saw banks expecting upward of 20 percent down for an auto loan while subprime borrowers had to shell out as much as 40 percent.”

Availability of credit to subprime borrowers was key during those pre-recession years when vehicle sales approached the 17 million-unit mark. It will also be key to the industry cashing in on current pent-up demand, which is remains high but is showing signs of shrinking. According to CNW, the pent-up demand pool is half of what it was last year.

“That translates into fewer people who will enter the shopping funnel,” Spinella wrote. “And that translates into more marketing dollars needing to be spent to put those not activity looking to buy a vehicle into the shopping “spirit.”

So far in August, the numbers look good but not spectacular. Same-store sales are up nearly 9 percent this month, while floor traffic climbed nearly 14 percent vs. a year ago. Closing ratios, however, were down nearly 4 percent, as concerns about home-centric economics continued to hold consumers from pulling the trigger.

Based on CNW’s first-half data, deliveries approached the 1.2 million mark for a true deliver rate of just less than 14 million units. Helping out so far is a boost in subprime approvals, which were up 48 percent from last year and up 17 percent from July.

“The question is if this is sustainable,” Spinella said. “The unweighted rate of approvals for all FICO categories inched upward to 66.36 percent versus 62.8 percent a year ago.”

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