Despite a slew of market challenges, the automotive retail market continues to motor along. In the driver’s seat is an improving auto finance market, CNW stated in its April Retail Automotive Summary.

Looking at the first third of April, floor traffic is up 12 percent from a year ago, while closing ratios are up 2.3 percent. And with loan approvals climbing dramatically, CNW said the industry is on track to retail 1.112 million units (both new and used), a 14 percent increase from a year ago.

“All credit categories are seeing higher new-vehicle loan approvals versus a year ago, with subprime up a staggering 92 percent,” wrote CNW’s Art Spinella. “Granted, that increase is based on a low rate last year, but it shows just how much looser credit has become.”

Spinella added that if there is a last minute surge in incentive spending, sales could reach 1.2 million for the month. However, Spinella did point out that some vehicles are beginning to suffer parts shortages due to the March 11 Japanese earthquake and tsunami disasters. “All said and done, positives and negatives included, 1.112 to 1.115 [million] is highly likely,” wrote Spinella.

The negatives Spinella referred to include the concerns highlighted by his firm’s Jitters Index, which continued to slide by double-digits vs. a year ago due. Leading those concerns are federal taxes and the condition of investments. Gas prices, day-to-day needs and food prices are also major concerns among consumers. But as Spinella pointed out, vehicle financing will be there for consumers who are willing buy.

Aside from the uptick in subprime approvals on new-vehicle loans, CNW reported that both prime and nearprime new-vehicle loan approvals experienced significant increases, with nearly 90 percent of prime customers getting a positive result. “That’s the highest in more than five years,” wrote Spinella. “Nearprime applications are similarly registering a high watermark, with 70 percent getting approved.”

Even more encouraging is the fact that the average FICO score on a new-vehicle purchase dropped to 673.7 during the first 10 days of April, with more than 14 percent of consumers who financed a new-vehicle purchase owning a score of less than 670.

Spinella also wrote that incentives are there for consumers who are willing to buy. In fact, more than 84 percent of new vehicles sold carried an incentive in the opening days of April – the highest share since September 2005. However, most of the incentive dollars are going to passenger vehicles vs. trucks.

The good news is that while the share of vehicles carrying some form of incentive has increased, the actual expenditures per vehicle have declined. In fact, as a share of average MSRP, transaction prices hit a 10-year high in the opening days of April at 86.9 percent.

“Add to that a firming of prices and the relative intensity of demand among those who can afford a new vehicle, and the gap between MSRP and what consumers are willing spend narrows,” wrote Spinella.

But Spinella also wrote that manufacturers are being more careful and targeted with their incentive spending, adding that carmakers aren’t looking for a repeat of what happened during the early 1990s recession and in 2009, when total discounts to consumers hit an all-time high of nearly 23 percent. In both instances, the incentive wars were draining profits from all automakers, especially those in Detroit. Currently, April’s 13.07 percent discount rate vs. MSRP is the lowest since 1996.

“Dealers are the primary beneficiary of these dwindling discounts since they are using fewer of their own dollars to close a deal than was necessary just a few years ago,” wrote Spinalla. “Manufacturer incentives directly to consumers or to dealers to use as ‘deal closers’ are becoming more targeted, and, in many cases, are being regionalized down to specific micro markets.”

Still, with oil prices hovering around $110 per barrel, rising gas prices will continue to challenge dealers. For instance, while economy cars started the year well behind a year ago, they now are the hot ticket. CNW’s March sales data shows budget cars held 1.27 percent of all sales, while economy cars jumped to 14.2 percent of all sales. Large SUVs and pickup trucks both had dramatic declines in share of sales.

“For April, expect budget and economy cars to climb to 1.5 percent and 14.8 percent, respectively, of total sales,” wrote Spinella.

The good news is financing is available for consumers in the market for a used vehicle. Early indications in April, wrote Spinella, showed used-vehicle financing climbing to more than 52.7 percent of all sales. And consumers are not only getting approved, they’re getting loans for higher content vehicles.

“Small, fuel-efficient models with all the gadgets are moving off of lots nearly a third faster than comparable low-content models,” wrote Spinella, who reported that franchised dealers are showing a near 8 percent increase in used vehicle sales so far in April. “Lenders are seemingly willing to fund these higher-priced small cars.”

Also receiving quicker approvals are vehicles seven to 12 years old. “In 2009 and 2010, these middle-aged models were held to 24 to 30 months, but now are receiving upward of 60 months,” he wrote.

Spinella said the used-car industry is on track for a 10 percent increase in sales in April vs. a year ago. In March, dealers sold an average of 57 used vehicles per outlet, up 5.4 percent from the same month last year. In fact, March 2011 represented the best monthly unit number for used vehicles in almost four years.

“Driving much of the volume is the willingness of finance companies to provide loans to a deeper pool of potential buyers,” wrote Spinella, who said FICO scores on used vehicles dipped to 606.8 in April, with nearly 40 percent of buyers owning a FICO score of less than 670.

“The industry is reaching the point where newer used cars are beginning to encroach on the price of new cars,” Spinella added. “That has two effects: One tends to cap how much higher used prices can go, which simultaneously diminishes the need for new-car incentives.”