Several “sub-prime” or “secondary” auto lenders recently change their lending guidelines to reflect current market conditions. When gas got up to $3.00/gallon, consumers barely flinched. Maybe because they could see it coming for a while. Once gas hit $4.00 to $5.00/gallon it changed the way people thought about their cars, their lifestyle, and their budget.
Many of the people that own (or have loans on) Trucks, SUVs, and even motor homes can not afford the high payments and the cost to drive those vehicles as often as they used to. Loans on these types of vehicles are in default at unusually high levels. Truck and SUV repossessions have increased so much that the sheer volume of these vehicles at bank auctions would be enough to drive the prices down, but when you add in the fact that no one wants to buy the vehicles because of gas/economic concerns the auction prices have dropped drastically.
Secondary lenders, who by nature have more exposure to higher risk customers, are feeling the brunt of the repossession losses. When their customers cannot afford to make the car payments because of gass prices and the vehicle gets repossessed, the auto loan lender has to take the car to auction and is forced to take whatever the going value is for the vehicle (no matter how much the customer owed). In many cases the lenders are getting $10,000-$15,000 less for the vehicles at the auction than the customer owed on the loan. Of course, the customer is still liable for the deficiency balance, but the lender has to go through the collection process (which is not cheap) and with bankruptcy filings spiking (more on this in future posts) the lenders are being forced to eat much of the balance, if not all of it.
Secondary lenders, who have a much higher reposession rate than prime lenders, have started to take steps to adjust to the current economic conditions. In the last three to four weeks, several of the auto lenders we use at WashingtonAutoCredit.com have dramatically changed their lending guidelines on Trucks and SUVs. One of the lenders only changed the policies on vehicles with V8 engines. The other changed the lending guidelines on all mid-size and full-size trucks and suvs.
What does that mean?
Secondary lenders have three tools at their disposal to offset the risk of certain loans: Interest Rate, Acquisition Fees, and Loan Advance.
Interest Rates
We have not notices a huge difference in interest rates between truck loans and car loans. Hopefully this does not change. We have noticed that auto loan interest rates, in general, have gone up in recent months to reflect the growing risk amongst consumers.
Acquisition Fees
Acquisition fees are fees charged to auto dealers by the lender as a cost of doing the secondary loan. These fees are normally absorbed by the dealer, and will reduce the profit of a vehicle sale by raising the cost of the vehicle. These fees are indirectly passed on to the customer because, hypothetically, the vehicle could have been sold to a cash buyer for the same profit at a lower price but the dealer does not see the money, the lender does. The acquisition fees with some of our lenders are higher on trucks and SUVs than they were a few months ago. The lenders do not want to lend on these vehicles, but they will if we give them a high enough acquisition fee.
Loan Advance or Loan-to-Value
The most common form of loan control. The lenders are often lending a lower loan amount relative to the vehicle book value on trucks and SUVs to reflect market conditions. If a vehicles book value (according to the bank) is $10,000, the lender may lend $11,500 on an economy car, or they might lend $8,000 on a truck. Often times, we can get people approved with no money down on a car loan, but to buy a truck it might take $3,000 or $4,000 down for no other reason than the lenders do not really want to do the loans on those vehicles.
In addition to market demand for trucks and SUVs being at an all time low, people that are in the market for a vehicle are almost exclusively looking for cars with good gas mileage. The auction prices of “economy” cars have increased dramatically. The lenders have not made the same adjustments towards the increase in economy value that they did in the decrease of truck and SUV value. One could assume that changes such as increased loan-to-value ratios on economy vehicles will be coming shortly but it is hard to assume when the current economic indicators are so poor.
The same loan advance of $11,500 on an economy vehicle might not be enough to help a customer buy it with no money down because the dealer might have to pay as much as $11,000 to buy the vehicle at the auction. By the time the vehicle is transported to the dealer, and put through the reconditioning process, the dealer might need $1,000-$2,000 down just to help the customer be able to buy an economy vehicle.
If you or someone you know is looking for an auto loan, try WashingtonAutoCredit.com. We always pride ourselves on being straight forward, to the point, and honest with our customers. We re used to seeing bad credit, even bankruptcies. What do you have to lose?
