By Mike Antich
Today’s tighter credit terms are exerting strong downward pressure on new- and used-vehicle sales. Automakers, along with franchised and independent dealers, say tougher credit requirements are keeping potential buyers from buying new and used vehicles. More and more consumers are having trouble getting loans, and if they do qualify, they are paying higher interest rates. Banks are reluctant to lend for a number of reasons: they are short on liquidity, are more risk adverse, demand a higher risk premium, and need to increase profits to rebuild balance sheets. Financial institutions are now more demanding, requiring more money down and better income-to-debt ratios.
But more importantly, more lenders are putting caps on how low a FICO score they’re willing to fund, which is often above the threshold of subprime borrowers. Dealers say subprime borrowers, those with FICO credit scores of 600 and below, have been pushed from the market by banks and automakers’ captive finance companies, which are fearful of lending to risky customers. Funders, such as Wells Fargo Auto Finance and GMAC, have further tightened underwriting standards to manage nonprime risk. Funders financing auto loans to subprime borrowers are increasing their review of loans by requiring additional crosschecking on all parts of a loan, including references. Some banks will quote ridiculous rates to fund subprime buyers.
For much of the past year, the tighter credit restrictions were limited to subprime borrowers. Now, even consumers with good FICO scores are being forced to put more money down on vehicle purchases. In addition, automakers have reduced retail leasing, which prices out some customers who can only acquire a vehicle at a lower monthly lease payment.
Tougher credit requirements from banks and finance companies, along with limits on money to fund leases, have caused sales to decline 20 percent at AutoNation Inc., the largest U.S. dealership group, comprised of 250 stores. “We just can’t get customers financed. It’s a huge problem,” said CEO Mike Jackson in a recent published interview. “The volume of the industry for both manufacturers and retailers is being dramatically restrained by credit. Sales are far below demand and far below trend.”
To give an example of how far sales have declined, retail new-vehicle sales were down 34 percent through the first three weeks of September, compared with the same period a year ago. Industry analysts are now lowering their forecasts even further based on this added factor of credit gridlock. For instance, J.D. Power & Associates lowered its September sales forecast to an annualized rate of 12.6 million units, down 400,000 vehicles from its prior prediction only two weeks earlier. That’s well below August’s selling rate of 13.7 million units. In comparison, 16.9 million vehicles were sold as recently as 2005.
Impact on Used Fleet Vehicles
An average end-of-service fleet sedan is three-years old with 65,000-plus miles. The resale market for these used vehicles encompasses diverse demographics. However, in most cases, the dealers who buy fleet vehicles at auction will ultimately resell them to someone of limited financial means. In many cases, these buyers have less than stellar credit and may only qualify for a subprime auto loan.
The bread-and-butter customers of out-of-service fleet vehicles are generally buyers with C and D credit, namely subprime buyers, who buy from independent dealers. These dealers are having difficulty getting subprime customers financed. Increasingly, retail buyers of used vehicles are not qualifying for lower-interest, short-term auto loans.
Since the onset of the subprime crisis, loan approvals for these customers are more difficult. In fact, for all levels of new- and used-car buyers – prime, near prime, and subprime – the share of loan applications eventually approved are down dramatically versus a year ago. Hardest hit, not surprising, are subprime buyers. Independent dealers are finding it more difficult to fund subprime buyers due to the number of institutions they need to shop before they can find a lender.
Many high-mileage fleet units are sold with some sort of dealer-provided financing, and thus, escape some of the turmoil caused by lenders tightening credit standards. However, some independent dealers are now finding it difficult to get funding themselves. Without it, there are limitations to their funding capabilities. In addition, independent dealers servicing the subprime market often find it necessary to lower the price point within their inventory mix to accommodate the less-than-favorable retail financing terms available to their customers, which adds to the downward pressure on resale prices.
Credit Crunch Continues to Intensify
The current credit crunch has been brewing for a while and continues to intensify. On Sept. 28, an agreement was reached for U.S. taxpayers to fund a $700 billion “bailout” of troubled financial institutions by buying their “toxic” assets. However, the next day, the U.S. House of Representatives voted down the proposal. Although this bailout is extremely unpopular, and rightly so, we may have no other choice. For example, General Motors Chairman and Chief Executive Officer Rick Wagoner said the $700 billion bailout of the U.S. financial industry would help automakers by loosening up credit availability. Let’s hope this does happen, because without credit, our industry comes to a screeching halt.
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