While the National Auto Finance (NAF) Association’s annual survey reflected a drop in available nonprime and subprime financing sources, it also illustrated that those remaining exited 2008 with a better understanding of how to manage risk. It’s one of the reasons why consumers continue to be steered toward the used-vehicle marketplace.

Conducted by Benchmark Consulting International, the 2009 Nonprime Auto Finance Survey revealed that used-vehicle portfolios outperformed new in 2008, which Rich Apicella, managing director of the firm’s Americas division, attributed to improved portfolio management and tighter underwriting by finance sources.

“The performance on the used vehicles was stronger than the new, which points to the experience of the NAF member finance sources in this market,” he said of the survey’s results, which compared data from the 2007 and 2008 calendar years. “They just have more experience with used collateral and the used-car buyer.”

Despite the number of respondents falling from 26 last year to 22 this year, Apicella said the study provides a sampling of more than 2.2 million accounts worth $28 billion. Association officials said a number of companies which did not participate indicated they had either exited the market or sharply reduced originations.

Sources Cautious; Want Bigger Down Payment

Looking at the building blocks of a deal, including FICO score, amount financed, term and loan-to-value (LTV) ratios, the impact of last year’s credit market crash was clear.

“Finance sources have less capital to lend, so they’re much more focused on who they lend to, what collateral they lend on, and a better deal structure in terms of rate, term, LTV, etc.,” Apicella said, adding that conditions in the housing market further intensified the situation because consumers could not longer turn to home equity to help fund vehicle purchases.

Additionally, fewer finance sources and scarcer capital led to greater pricing power, as evidenced by a 50-basis-point increase in customer contract rate for both new and used vehicles.

On a year-over-year basis, FICO scores were up 6 points on new-vehicle originations, and 5 points on used. The average score for new-vehicle loans was 548, while the score for used-vehicle loans was 530.

Additionally, the average amount financed decreased by $357 for new vehicles to $19,632. As for used vehicle financing, the average amount financed dropped $72 to $12,718. These reductions hinted at finance companies demanding larger down payments. “Finance sources in general are trying to get a larger down payment, so that may very well reflect the reduced amount financed,” said Apicella.

Average term increased by one month (66 months total) for new vehicles and decreased by one month (52 months total) for used vehicles. Apicella said he expects terms for both segments to remain stable or shorten in 2009.


“Part of the underwriting standard is looking at the term, and you’ve seen a great moderation in the increase this year,” he said. “I think people have come to their senses a little bit more, and have reduced term as much as they can while still being competitive in the market.”

Loan-to-value ratios decreased for new-vehicle originations from 104 to 103 percent. However, LTV ratios for used-vehicle originations increased slightly from 117 to 120 percent. The three-point increase in the used segment was an indicator that finance sources were still willing to advance on vehicles that maintained their value.

“Finance sources like to lend money to people who buy cars that hold their value better. That’s because if you do have to repossess one, your losses are going to be lower because of the stronger residual values on certain makes and models,” Apicella said.

Tighter Guidelines Improve Portfolio Performance

The steps finance sources took to manage risk not only led to better portfolio performance, but it also demonstrated that survey respondents had a better grasp of the used-vehicle market.

The 30-day delinquency rate for new-vehicle financing increased from 4.91 percent to 5.57 percent, while used-vehicle rates decreased by 139 basis points to 7.92 percent. The average annualized repossession rate on new vehicles increased from 3.93 percent to 4.28 percent, while the rate for used-vehicle financing decreased slightly from last year to 9.73 percent.

The disparity in performance between new and used financing was also apparent in the annualized net dollar charge-off rate. For new, the rate increased from 6.30 percent to 8.13 percent. For used, the rate decreased from 6.82 percent to 6.22 percent. Apicella said the data not only speaks to stricter guidelines, but also to the financial difficulties consumers began experiencing last year.

“You’re seeing changes at the dealership where people might originally come in for a new car, but are placed into a used vehicle because of tighter underwriting standards,” Apicella said. “You’re also seeing a situation where new-vehicle buyers maybe found themselves stretched, which might have contributed to the rise in repossessions. The good news is that the used side was fairly consistent.”

Apicella added that the survey’s findings revealed two other trends. First, the reduction in finance sources in the used-vehicle market is creating more opportunities for those that remain. The results also point to consumers still being able to finance a vehicle purchase during these tough economic times.

“With the right deal structure in place, there’s opportunity to get people financed,” said Apicella. “It might not be a new car that they can get, but there will still be money out there to purchase a used vehicle.”

Source: 2009 Non-Prime Automotive Financing Survey