Subprime Loans Come Back

SAN FRANCISCO — Dealers are selling more cars to customers with subprime credit ratings these days. That's good news and bad.

Bad because many consumers saw their credit scores drop to subprime and non-prime levels after suffering job losses, home foreclosures and other recessionary ill effects.

But it is good news to the auto industry that more lenders are easing up and extending loans to people with bruised credit. Subprime lending had approached extinction during the credit freeze of 2008 and 2009.

Subprime customers make up a significant chunk of the car market, note dealers at an American Financial Services Assn. conference being held here in conjunction with the National Automobile Dealers Assn. convention.

In states such as Arizona and Nevada where the real-estate bubble burst with particular force, about six of 10 of the Larry H. Miller Automotive Group's customers are subprime, says Brian Leary, the firm's finance and insurance director.

“Overall, subprime was 20% of our business last year, and we expect that to go up,” he says. “One reason is because there is more subprime lending available. Another is that more of our customers fall in that lending category.”

A wide range of consumer lending is vital to the auto industry, says Stephen Wade, NADA's incoming chairman and a dealer in California and Utah. “There's a saying, ‘Nothing happens until the sale is made.’ (But) a sale doesn't happen until a loan is made.”

Although subprime lending has eased up, some cautious financial institutions remain reluctant to get involved in that segment. Or if they do participate, they set sky-high interest rates.

“We have people that want to buy a car but are in situations they haven't been in before, and it's those B- and C-level customers we need to find lending outlets for,” Wade says referring to customers who have seen credit scores drop.

“They are people who help make this country run, people who had challenges the last few years,” he says. “A lot of people are like that. We need lenders to buy paper for 600 and 650 credit scores and offer a decent rate.”

Lenders should see the full picture when looking at subprime customers, says dealer Michelle Primm, managing director of the Cascade Auto Group Ltd. in Cuyahoga Falls, OH.

“Don't just focus on the credit history,” she says. “Focus on the customer, too. Do they have integrity? Do they have collateral?”

She urges lenders to look beyond rate charts that strictly adhere to risk-based pricing. “Tell me how to get a deal bought,” she says. “Don't just tell me, ‘No.’”

Praising lenders that show flexibility, Wade says Toyota Financial Services recently “impressed” him for extending an auto loan to one of his loyal customers even though the person went through a home foreclosure.

Conversely, Leary tells of a customer with a lower credit score who experienced an easier time getting a loan than someone with a higher score, despite having missed house payments.

“It is almost fashionable sometimes for some people not to make their mortgage payments, but they do pay on their auto loans,” Wade says. “They are letting their homes go, but not their cars.”

Financially stressed consumers do that for brutally practical reasons, agrees Ray Thousand, CEO of Alliance Acceptance. “You can live in your car, but you can't drive your house to work.”

Lenders must recognize “good things about our customers, not just bad things,” says William Underriner, general manager of Underriner Motors in Billings, MT.

“It's great to have ‘A’ paper, but if a customer comes in needing a more aggressive program, we need to be able to offer that,” he says. “We need to finance those customers who are somewhere between A and D levels.”

Although the mortgage industry tanked and took Wall Street down because of bad loans, auto lending performed much better, Wade says. “Auto paper is good paper.”

Adds Underriner: It wasn't the auto industry that made Wall Street crash.”

He says his dealership tries to educate customers on financing issues, such as the wisdom of putting a hefty down payment on a vehicle.

“We also educate them about leasing,” Underriner says. “Why put customers in a 60-month loan when you can put them in a 36-month lease and get them back to the dealership sooner? A big down payment does the same thing.

“(The) 72- and 84-month loans are not good for the customer, the dealership or the lender,” he adds. “With shorter-term loans, we're all better off.”

More lenders are returning to levels below prime because that is where growth opportunities are, says Douglas Ekizian, senior manager-PricewaterhouseCoopers LLP's Consumer Finance Group. “The prime market is saturated because everyone wants the prime customer,” he says.

Today's subprime car buyers are different, mainly because many of them once had higher credit scores, but also because they are more realistic, says Cindy Kanellis, finance director at Freemont Chevrolet in San Francisco.

“They are trying to buy a reasonably priced car that they will be able to pay off,” she says. “They are interested in $15,000 cars. Before, they wanted a Cadillac Escalade.”

And even though they really couldn't afford that luxury vehicle, they bought one after finding a willing lender back in the days of much easier credit, Kanellis says.