Automotive News - December 1, 2008 - (Page 24) 24 • DECEMBER 1, 2008 INSIGHT Risky business The below-subprime sector — consumers with credit scores below 550 — is the fastest-growing credit tier, according to Experian. Below-subprime loans made up 13.7 percent of all open auto loans in the 3rd quarter of 2008, up from 9.6 percent in the 4th quarter of 2006. 20% Some dealers capitalize on below-subprime sector Chrissie Thompson cethompson@crain.com Below-subprime loan share 15 10 5 0 Q4 '06 Q1 '07 Q2 '07 Q3 '07 Q4 '07 Q1 '08 Q2 '08 Q3 '08 Source: Experian Automotive The below-subprime sector is the fastest-growing credit tier, according to the financial research group Experian Automotive. And some dealers are taking advantage of the growth, despite tight credit markets. Below-subprime loans — financing for customers with credit scores below 550 — made up 13.7 percent of all open auto loans in the third quarter, up from 9.6 percent in the fourth quarter of 2006. Through the third quarter, 56 percent of open auto loans were to prime customers, or those with credit scores above 679. But that percentage has decreased 11.1 percent since the fourth quarter of 2006. During the same period, the percentage of open loans that are below-subprime increased 42.7 percent. A slip from prime “You’re really just seeing the slip- ping of the credit,” says Melinda Zabritski, Experian’s director of automotive credit. “You have consumers out there who were prime and who are no longer prime, and you’re really just seeing a continual slipping of the risk tiers.” The market shift is one reason behind tightening lending criteria, Zabritski says. “Lenders are going to change their lending policy based on the strengths of their current portfolios, and what they’re seeing in their current portfolio is an increase in delinquency,” she says. That caused lenders to make prime loans 59.7 percent of the financing they originated in the third quarter, up from 56.3 percent of loans in the previous quarter and 55.4 percent in the fourth quarter of 2006. If this pattern continues, Zabritski says, prime loans may regain market share. But more borrowers also could slip into the below-subprime tier as economic conditions worsen. Selling the subprime Although credit has tightened, auto dealers can capitalize on the growing below-subprime market, especially by building relationships with the few lenders still financing below-subprime loans. As of the third quarter, that group included Credit Acceptance, Westlake Financial Services, AmeriCredit, Consumer Portfolio Services and CitiFinancial, Zabritski says. Below-subprime customers will continue to buy vehicles, despite the recession, says Jack Tracey, executive director of the National Automotive Finance Association. “If you’re a prime customer and things are more uncertain, you may delay on purchasing a car,” Tracey says. “The people that are in economic difficulty generally need a car because the old one’s broken and they need to get to work.” Many dealerships — mostly independent resale dealers — capitalize on the below-subprime market by using “buy here, pay here” loans they finance in-house. Some work with financing companies that share the expense of the in-house loan, helping dealers expand their cash base. Joe Dawson, dealer principal at Polo Suzuki in Muncie, Ind., has used Westlake’s Profit Builder program for the past two years as a way to serve below-subprime customers needing used vehicles. Westlake typically advances him the wholesale value of a car, Dawson says, and Polo Suzuki and Westlake split the profits or losses from the customer’s payments. The program allows Polo Suzuki to tap inexpensive trade-ins as a money source, Dawson says. Dawson uses the program for less than 10 percent of the 800 used cars he sells each year. But a dealer who sells new cars for $15,000 might be able to use a similar below-subprime loan plan, he says. Dawson adds that dealers who want to sell used cars to below-subprime customers should assign a staff member to identify older, reliable cars to sell to those buyers, since much of the loans’ success depends on whether the buyer has future repairs. c We’ll help you avoid the accidents ABS can’t. Unfortunately, you can’t reverse time. That’s why Travelers IndustryEdge coverage is tailored to your business, and the unique risks associated with it. Our experts have a deep understanding of the Franchised Auto and Truck Dealer world, and know how to put the brakes on an accident before it happens. Call your Travelers agent today, or find an agent near you at travelers.com. ©2008 The Travelers Companies, Inc. All rights reserved. The Travelers Indemnity Company and its property casualty affiliates. One Tower Square, Hartford, CT 06183 travelers.com http://www.travelers.com http://www.travelers.com http://www.travelers.com
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