Subprime Lending Tough

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.