Lending Eases, But Some Car Buyers Still Face Credit Issues

One reason auto sales tanked in 2008 and 2009 was because the credit industry went into a deep freeze.

A reason auto sales are as vibrant as they are today is because credit is flowing.

With the thaw comes lower interest rates, more competition among lenders and a higher degree of customer-friendliness.

Consumers have several sources to obtain financing. Lenders see auto financing as a better risk compared with other forms of credit.

But there’s a downside. Lenders still require stricter credit-application verifications than before and some consumers remain credit challenged, dealers say.

But it is not nearly as bad as before, says Lawrence Searcy Jr., operations manager and general counsel with Walker Automotive in Alexandria, LA.

“In 2008 and 2009, the biggest issue facing our business was the number of lenders available to make car loans,” he says. “We lost a number of our bigger prime lenders who either pulled out of the market altogether or simply restricted lending to customers with excellent credit.”

Walker is the largest-volume dealer group in central Louisiana, carrying Honda, Buick, GMC, Mercedes-Benz, BMW, Kia and Mitsubishi brands.

“The auto economy is growing, but not because there is more disposable income,” Searcy says, citing, among other things, pent-up demand.

The average age of vehicles on the road is nearly 11 years, a record, according to data firm R.L. Polk.

“Our incremental sales over the past two years are partially being driven by customers who simply need a new car because the one they are driving is no longer reliable or safe,” Searcy says. “Customers have made the decision to forego multiple and expensive repair bills in favor of a newer automobile with a warranty.

Dealerships still see a share of credit-challenged customers coming from three primary areas of distress.

One is bankruptcy generally related to a lost job or divorce. Another is unpaid medical bills, where a person lacks health insurance. A third is trouble paying off crippling school loans, because the former student lacks employment or has a low-paying job.

Prolonged illness also can play a role in payment history. Many credit scores have been hurt by late payment due to that. And divorce almost always negatively affects credit.

Bills don’t get paid on time during the separation, either due to conflict over who’s responsible for them or because the loss of one of the incomes reduces the ability to pay on time.

In the flush economy before the recession, cars were traded more often because of the availability of credit. Banks did not look as closely at debt-to-income ratios as now and customers were not asked for money down.

“Now, customers are asked to come up with money to cover such things as negative equity and taxes,” Searcy says. “Many don’t have that kind of disposable income and so they have to wait to buy until they have a down payment saved.”

The market upswing is real, because financial institutions have money to lend, says dealer Lou Giordano, owner of Croton Auto Park in Westchester, NY.

He runs the largest Chrysler, Jeep and Dodge dealership in New York’s Westchester, Putnam and Rockland counties. He is also chairman of the Greater New York Automobile Dealers Assn.

“Consumer credit is better than it was, but what we see today are mortgage payments later than ever and still many people out of work and higher credit card debt,” he says.

“However, these hurdles are more easily overcome than in the past if a buyer can provide more equity in the form of a down payment,” Giordano adds.

Lenders realize consumers need their cars and are relatively good risks, he notes. The auto-financing sector never suffered the bloodbath and financial losses the subprime-mortgage industry recently went through.

“Buyers with more serious credit problems can still get loans but have to provide verifiable proof of income and agree to have interviews by phone with the prospective lender,” Giordano says.

His dealership group maintains solid relationships with two primary lenders. “There is a healthy competition again among banks and some non-captives are offering leases again,” Giordano says, referring to lending firms that aren’t connected directly to auto makers.

A morass of legislation and rules also can challenge the vehicle-purchase process or at least slow it down. Dealers must comply with more than 70 federal regulations and rules.

“We are faced with very comprehensive federal legislation and rules requiring compliance with the Truth in Lending Act, Fair Credit Reporting Act, Equal Credit Opportunity Act, Gramm-Leach-Bliley Act, identity theft regulations, adverse action notices, OFAC (Office of Foreign Assets), records retention, personnel, and a host of other regulations,” Searcy says.

For those with shakier credit, sources are more available for sub-prime credit. For these borrowers, it’s a chance to re-build credit after a personal financial setback.

Some consumers complain their scores remain low even though they’ve been paying bills on time.

Credit scores are heavily weighted by delinquencies and late payments. A slightly late car payment can negatively affect a score, experts say. Scores range from 300 to 850, as defined by FICO (Fair Isaac Corp.) with the high notes of 700-799 achieved by about 27% of loan applicants.

“Many of our customers are paying regularly, but show multiple late payments over 30 days because of lack of time to get the bill in the mail or while waiting until payday before paying the bill,” Searcy says.

“And third-party collection agencies are slow in reporting payments to the bureaus.”