Dealers, vendors and finance companies attend the annual NADA convention for a variety of reasons: education, networking, the opportunity to see the latest in products and services and, in some cases, the parties. My annual trek is always undertaken with a focus on getting valuable face time with the top executives of the banks and auto finance companies that serve our market. That gives me the chance to learn how their programs have changed so I can pass that information on to dealers.
I also want to learn how their companies are doing, what we should expect over the next 12 months and, finally, where they see the special finance segment heading.
Mind you, for a myriad of reasons, I have been expecting a downturn in the fourth quarter of 2014, and I still do. I said as much in each of my conversations, but I came away from the convention feeling much better about 2014 — very bullish, actually — and any impending downturn.
The SF industry has been very cyclical over the past 25 years. About every five or six years, the lending market has become very competitive (read: “loose”), leading to a few companies really stretching the envelope with regards to dealer advance, loan-to-value (LTV) ratios and term. It last happened in 2006 and 2007. At the time, I often said that even a trained monkey could structure a subprime deal, throw it against the wall and make it stick.
That can’t go on forever.
Companies in bullish markets fight for share and then, “suddenly” (or so we all say), there is a hiccup or two. After said hiccup comes a period in which dealers find it tougher to get deals done, and the reverse occurs: Advances tighten and fees and discounts seem to increase. This last happened in 2008 and 2009 when SF companies and banks drastically tightened up. It became extremely difficult or even impossible for those that need to borrow capital to lend to do so; in this case, all caused by factors not involving automotive. Many dealers thought that the end of subprime lending had occurred. Obviously, it didn’t.
When the tightening occurs, to no one’s surprise, those that remain in the segment generally become more profitable. SF banks and finance companies enjoyed record profits after those two years of tight credit. Record profits in turn encourage growth and the loosening of credit, which brings us to where we are today. For those of you who refused to abandon SF in 2006, that year, 2007 and even the first part of 2008 brought incredibly profitable days.
Today, we find ourselves six years into a cycle that only lasts about that long. The good news is that every executive that I spoke with sees a year full of continued prosperity ahead. Even though margins are shrinking, many of the markers that tend to impact the industry — e.g. increasing unemployment — are still not present. Loan performance, while not as good as it was after the tight credit policies of 2009 and 2010, is still very good. Indeed, while many of the companies are happy with their market share, some are predicting some incredible growth for 2014, which means good things for dealers.
In the past, a bigger down payment could mean the difference between approval and denial. The author has learned that bank and finance company executives are more interested in whether the customer has the ability to repay the loan.
I also had the chance to assuage my concerns about the financial health of the executives’ companies. CEOs, COOs and presidents have been very forthcoming with me over the years. This year, every one of them led me to believe they are on very sound financial footing. No matter what happens in the market, they say, and in spite of what the rumor mill might churn up, they feel secure in their position. For those that securitize their portfolios in order to raise capital, the pricing of upcoming securitizations are expected to be at or below their last venture into the market. All this news bodes well for dealers.
Finally, as I also predicted two years ago, we finished 2013 at a seasonably adjusted sales rate of nearly 16 million new units, the highest since 2007. All industry analysts predict that we will eclipse that mark in 2014. Combine that with the fact that (a) credit scores have continued to deteriorate and (b) 28% of new cars are sold to subprime credit customers, and you should have a recipe for good things to come.
So what does this mean to you and your SF department? First and foremost, if you aren’t in the game, you are missing a significant part of the business. Experian reports that the average credit score for someone financing a used vehicle is 657. That means that the average used-car buyer has nonprime credit. You may not consider yourself to be a used-car dealer. So what? New or used, you should fight for your share.
As for the actual programs, the individual transactional data that is reported to me daily by dealers across the U.S. tells me that less emphasis is being placed on down payment, even in the lower credit tiers. This trend was confirmed by many of the bank and finance company executives I interviewed. Of the last 1,800 deals reported to me on sales financed where the primary applicant has a credit score of 650 or below, the average cash down payment is just $961. Additionally, in 111 of those deals, with credit scores below 474 (451 average), the average cash down payment was just $869. It’s important to note that 82% of those deals were bought by mainstream SF banks and finance companies, not portfolio-style finance companies.
Still not convinced? Here’s another interesting takeaway: Approvals for the lowest credit tiers do not appear to be due to factory-subvented programs on new cars. We could not have stated that emphatically a year ago.
To that point, roughly half of the execs opined that they are putting more emphasis on the ability to repay (payment-to-income ratio, or PTI) and risk (LTV) than on the initial cash investment. Couple that with some of the instant decisioning available in the market, and no SF manager can afford to glance at most deals and arbitrarily say, “This person can’t buy.” If they do, you are going to be passing up a lot of business.
It is important to remember two things: First, those 111 deals only represents about 7% of the total sample, so don’t expect a high percentage of these deals to be approved. There was very likely a strong income involved and maybe even a very fresh bankruptcy filing. Second, cash down still is important — and too many dealers just don’t do a good job in asking for it.
So that is both my takeaway from NADA and my perspective as I steam through my 25th year in the special finance industry. In the Midwest, we say “Make hay while the sun is shining.” Even though it is still may feel like the North Pole in many areas of the country, the sun is shining in our segment. Take advantage of it while you can!
Until next month, great selling!
Greg Goebel is the CEO of Used Car University and the industry’s leading special finance trainer since 1989. He is an 18-year former dealer principal and a highly sought-after speaker, author and consultant. GGoebel@AutoDealerMonthly.com