They're Fine with Subprime

When General Motors Co. announced it was buying AmeriCredit Corp. as its subprime captive finance arm, some savvy dealers issued a resounding vote of approval.

The AmeriCredit deal could give GM the major tools it needs to counterpunch domestic rivals by pulling in low-end and high-end buyers, dealers say. It will also return leasing to the GM portfolio, a market the auto maker had backed away from.

In turn for a roughly $3.5 billion AmeriCredit investment, GM gets a huge market lift and profits up the road. Some dealers say it's the ticket to directly compete against their chief rivals.

“General Motors gets a presence in the subprime market, potentially giving them increased sales and market share,” says Ohio dealer Chris Haydocy.

He estimates up to 20% of his clients are credit challenged but qualify for subprime financing, an area of lending GM retreated from when it began experiencing its own serious financial problems.

An exclusive GM dealer, Haydocy operates Haydocy Buick and GMC in Columbus and Haydocy Chevrolet , Buick and Cadillac in Bucyrus, OH.

If annual new vehicle sales are 12 million, it would typically mean up to 2.4 million vehicles are sold to subprime clients, Haydocy figures. “AmeriCredit now gives GM the capability to be competitive (or on par) with Ford and Toyota.”

Analyst Jesse Toprak at TrueCar.com in Santa Monica, CA, puts the distressed customer figure higher nationally.

The subprime market has been growing exponentially due to the economic downturn, says Toprak, vice president-industry trends. Some estimates are about 40% of all Americans are now considered subprime, he says.

“These are often buyers in the $20,000 to $28,000 vehicle range — perfect for Chevrolet, GMC Terrain and Buick Regals,” Haydocy says.

Depending on circumstances, even some luxury Cadillac and premium-model Buick sales could involve subprime buyers who now have access to GM financing through AmeriCredit.

That's because some luxury buyers are reasonably affluent people who found themselves in the subprime category because of a past reversal of fortune or an over-extension of financing.

“They're often overextended with large credit card debt, high mortgages and school loans,” says Mark Schienberg, president of the Greater New York Automobile Dealers Assn. “Traditional financing is not available in many of these cases, and that's where the subprime fits in.”

He adds: “People with a lot of money spend a lot of money. So they're overextended. They're not always a bad credit risk. Dealers always have someone doing subprimes. It's important for all markets, including the luxury market.”

What it really does is open up credit and financing for dealers and their credit-challenged customers at both the low end and high ends of the market.

Before the AmeriCredit deal, dealers were going to the open general market for subprime loans for their customers, if they could get them. Now it's more of an in-house matter.

Dealers aren't too worried about defaults with these buyers. Repossession rates are down this year compared with last.

Defaulting on car loans differs from other expensive loans, such as mortgages. “Having a car is a necessity,” Haydocy says.

Most people will cut back on food, entertainment and living quarters before giving up their vehicles, he points out. They need cars to work. And the subprime is the place to go for financing when money is short.

The subprime consumers AmeriCredit is going after do have credit hiccups, but are not huge risks, Haydocy says. “They may have credit blemishes to some degree — but the AmeriCredit clients are not customers who are going to be repossessed in 60 to-90 days.

“AmeriCredit has a stringent set of qualifications for credit challenged applicants.”

GM made a bold move in acquiring a captive again, dealers say.

“GM gets immediate gratification from AmeriCredit's distribution base,” says New York dealer Mark Calisi of Eagle Auto Mall on Long Island. His brands include Chevrolet, Chrysler-Jeep, Mazda, Volvo and Kia.

“More than 90% of all GM dealers use AmeriCredit,” so it's a smart move from all sides because dealers already have the relationships, he adds.

With this single move, GM, on the finance side, can earn an average gross profit of $1,800 per vehicle (based on a 3% markup on cost of funds), Calisi says. For primary loans, that profit goes up to $2,500, which reflects a 5% cost markup, he calculates.

His figures apply to an average consumer loan of $15,000 over a standard 48-month term.

“It loosens the credit restrictions we have had until now, and it will strengthen GM by leaps and bounds,” Calisi says of the GM-AmeriCredit deal. The $10 billion financial services company also is considered an asset to GM.

For GM it means another hurdle has been cleared on the recovery path.

You can't operate a car company effectively without having a captive that can provide a range of financing, not just loans to consumers with sterling credit, Calisi says. “GM was leaving too much on the table if it didn't do this.”

All major rivals, except for Chrysler Group LLC, have their own captives.

“GM's sales numbers have been strong recently, but these are still tricky times for the company as it navigates past bankruptcy and repays some $60 billion in government loans,” says Schienberg.

But the full recovery will take time and an impending Initial Public Offering won't be done in one fell swoop, he says. “GM now has a better economic model and is becoming more competitive. When dealers are doing well, it helps the manufacturer become more profitable.”

He adds: “GM is making a lot of good moves. You've got to have the right tools to make the business work . GM realizes it must spend money to get its portfolio to the point that it brings something to the table.

GM has a different arrangement with AmeriCredit than it had with GMAC, now Ally Bank. AmeriCredit will continue to serve other brands, while customizing its services for GM dealers.

Forth Worth, TX-based AmeriCredit already has relationships with around 4,000 GM dealers. The GM credit deal will “enhance dealer receptivity and improve sales penetration rates through coordinated GM branding and targeted customer marketing initiatives,” GM says.

AmeriCredit President and CEO Daniel Berce says the company will be expand product offerings to more fully support GM and “we'll continue to offer our loan products to the more than 11,000 dealers across the country we serve today.”

The transaction is expected to close by the end of 2010.

The arrangement will give GM access to about two to three million legitimately qualified, potential new-car shoppers, says Toprak.