Subprime Lending Tough
Lately I've spent a lot of time studying the special finance and buy here-pay here segment of the automotive financing market, looking for the most current trends and developments. I work in this segment of the market virtually every day. But I step back at this time of year to analyze the overall scope of the market. That's so I can offer an industry overview at our National Special Finance and Buy
October 1, 2002
Lately I've spent a lot of time studying the special finance and buy here-pay here segment of the automotive financing market, looking for the most current trends and developments.
I work in this segment of the market virtually every day. But I step back at this time of year to analyze the overall scope of the market. That's so I can offer an industry overview at our National Special Finance and Buy Here-Pay Here Conference in Las Vegas.
We receive calls each week from dealers asking what's in store for the near term with respect to special finance and buy here-pay here, a setup in which dealers finance car loans themselves.
Our research and analysis of the market leads to these observations:
Over the 12 months we've seen a marked tightening of credit in the subprime sector of the market. Many of the lenders we talk with refer to it as a departure from subprime and a move toward “nonprime/nearprime.”
We fully expect this trend to continue. Given the current woes of companies such as Americredit and the state or our economy, it's difficult to envision an easing of credit standards any time soon. The result is that you can still sell your 25, 50 or 100 units per month but you will need more applications to produce the same result.
The beacon score “cut-off” point for most lenders continues to move higher. In 1998 many lenders would consider an application with a beacon score as low as 480. In 1999 we saw this increase to 500. In 2001 we saw a move to essentially 540.
While this trend is absolutely the best move to preserve the lenders serving the market, it thrusts more consumers into the turn-down bucket. We would not be surprised to see 560 or 575 in the future.
Well-capitalized buy here-pay here dealers are recognizing double-digit growth. The buy here-pay here market is alive and well. As the beacon score bar continues to move higher, that creates more consumers who turn to in-house dealer finance programs.
For many buy here-pay here dealers, sales are only limited by their access to capital. We are observing many buy here-pay here dealers up 15 to 20 or more percent over last year. This trend is likely to continue well into 2003. The message for buy here-pay here dealers: secure your capital, sell some cars and make some serious money.
Expect a substantial increase in the number of consumers in this “unbankable” segment. This will be driven by increased portfolio losses for subprime (oops, near prime) lenders which, in turn, will force tighter credit standards. Buy here-pay here dealers who are well-capitalized will have the opportunity to increase their share of vehicles financed.
So the message is simple. If you are running a special finance department, be prepared to work harder than ever for the same number of deals. And yes you can do it.
Set a goal to increase the number of apps you look at a month by 50% and you should be fine. This will yield the same number of deals that you previously financed based on lower application volume. Your look-to-book ratio will become more important than ever because lenders will need to operate at peak efficiency. They want to deal with the best.
If you are a buy here-pay here dealer get your capitalization in order immediately. The rewards will be increased profits and an excellent opportunity to build your customer base.
Chris Leedom is president and CEO of Leedom and Associates, a Twenty Group training and consulting firm. He's at [email protected] and 800-966-8733.
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