LAS VEGAS ‚Äď Auto dealers, accustomed to choosing from a wide range of indirect lenders to arrange financing for car buyers, are finding the field narrowed and selective.
Responding to economic pressures in today‚Äôs shaky market, lenders now are picking which dealers they want to deal with. So-so operators need not apply.
‚ÄúWe‚Äôre managing our dealer base more than ever, looking at how they run their businesses,‚ÄĚ AmeriCredit CEO Dan Berce says at the 2008 Auto Finance Summit here.
That includes what type of loan requests they are forwarding. Lenders particularly are interested in the quality of loan applications. Customers with poor credit and little or no down payment won‚Äôt get far. Incomplete or fluffed information on credit applications always has been frowned upon. Now it can be the kiss of death.
‚ÄúIn today‚Äôs environment, there is zero tolerance for any shenanigans whatsoever,‚ÄĚ says Jim Case, CEO of Scotia Dealer Advantage.
Adds Berce: ‚ÄúOur access to credit puts limits on who we do business with. We‚Äôre looking at how clean the packages are, how dealers are putting deals together. We‚Äôre dealing with dealers who put the best deals together.‚ÄĚ
Dealership customers still get loans, and banks still make them to earn money on the interest. But because of current economic conditions, auto dealers and their lenders face credit challenges on two fronts.
First, credit is tight, making less loan money available. Second, many consumers in the last 12 to 18 months have seen their credit scores drop, making them less attractive as borrowers.
That double-whammy has clobbered auto sales, which, in turn, may claim some dealers as victims.
‚ÄúThis is the worst I‚Äôve seen it,‚ÄĚ Berce says. ‚ÄúOf the 10 trends we track, eight are flashing warning signals and the other two are neutral.‚ÄĚ
Under tighter lending conditions, for every loan AmeriCredit makes, three existing loans must be retired. ‚ÄúBecause in this market that balances out,‚ÄĚ Berce says.
At Scotia, ‚Äúfor every new loan that goes on the books, one has to come off,‚ÄĚ Case says.
Chevy Chase Bank is approving 50% of loan applications, and 50% of those have conditions on them, ‚Äúso it‚Äôs rough,‚ÄĚ says Chas Roscow, senior vice president of its consumer-lending division.
Lenders are slower in deciding whether to approve an auto loan, in part because most of them have pulled the plug on automated approvals, says Dawn Harvey, an administrative vice president at M&T Bank.
‚ÄúWe have to look at all applications and ask questions such as, ‚ÄėDoes this teacher really make $150,000 a year?‚Äô‚ÄĚ
Dealers don‚Äôt seem to mind the delayed responses nor that credit analysts now look at all loan applications, she says. ‚ÄúDealers perceive that as increasing the chances of approval.‚ÄĚ
Lenders typically have ranked customer credit worthiness in four groups. ‚ÄúBut there seems to be less middle ground,‚ÄĚ Roscow says. ‚ÄúIt comes down to: Will they pay back the loan or will they not?‚ÄĚ
Lenders and their dealer clients share the same concerns and pain, Kim Pulliam, CitiFinancial Auto‚Äôs chief marketing officer, says, noting some dealerships are shutting down.
The nation‚Äôs credit crunch is ‚Äúplaying on dealers as well,‚ÄĚ she says. ‚ÄúThey are asking, ‚ÄėWhere can I make money in this market?‚Äô‚ÄĚ
Dealerships ‚Äúare under attack‚ÄĚ because of reduced capital and fewer vehicle sales this year, Berce says.
Many dealers will go out of business or consolidate with others, Harvey says. ‚ÄúThere are dealers who aren‚Äôt going to be here in a few years.‚ÄĚ
How can dealers increase their chances of survival?
‚ÄúI‚Äôd advise them to carry less inventory,‚ÄĚ Roscow says. Among things, that would decrease floor-plan costs.
Dealers likely to pull through ‚Äúare the ones who have the strongest balance sheets, are smart about inventories and control their costs,‚ÄĚ Case says. ‚ÄúThe strong will survive.‚ÄĚ
He adds: ‚ÄúThose who understand the used-car market will get the most bang for their bucks.‚ÄĚ
Berce says AmeriCredit wants to partner with dealers who are ‚Äúin it for the long run and who understand that we can‚Äôt write the same loans that we did 12 to 18 months ago.‚ÄĚ
Things will get better, he says. ‚ÄúIt‚Äôs important to hunker down until they do.‚ÄĚ