Of all the recent activity in the Auto lending market, no one is busier than the companies that make car loans to buyers with bad credit. At the recent NADA (National Automobile Dealers Association) convention in Las Vegas, we were surprised by the number of companies represented at the show that handle High Risk Auto loans. The field has attracted 50 companies - most of them started since 1990 - and the explosive growth is expected to continue this year.
The rapid development tracks a surge in the market for used cars: 30 million used cars - two for every new one - were sold last year. The buyers included prime borrowers who balked at new-car prices, and a growing number of risky borrowers who may have had their credit shot in the recession of the early 1990s.
The push to lend to those at-risk borrowers comes from Auto Dealers, Finance companies and Banks attracted to the $60 billion-plus sub-prime market. Even investment banks have begun to show interest.
The new breed of sub-prime auto financier generally does not lend money to the buyers directly. Rather, they work with the New and Used car dealers who provide the loans to customers and then package and sell them to the finance companies.
Analysts who monitor the performance of the companies remain leery of their future, though believing that some of them are lowering their credit quality through inadequate underwriting and servicing procedures. "It's a long-term negative trend for the majority of these companies," says Andrew Jeffrey of Rodman & Renshaw Inc., San Francisco.
Analysts keep their eye on a lender's so-called advance rate (the finance-contract amount divided by the wholesale value of the vehicle) to track how aggressive the finance company is being and how much it stands to lose upon repossession.
Often the very reason that an Auto Dealer will be attracted to Check Guarantee is not necessarily because they have a "Check Problem," but rather that they realize the potential value in Guaranteeing "High Down Payments," and "Multiple Check Programs," and that such programs can help to get a high risk consumer financed, that might otherwise be difficult.
Based on hundreds of conversations at the NADA convention, it is clear that Auto Dealers are not particularly price sensitive on this part of their market, and see the opportunity to pass on high lending costs as well as Guarantee cost for Down Payment Guarantee, to the consumer. In addition, Auto Dealers are clearly feeling the high decline levels of many of the major Check Companies and understand that more approvals, not more declines, are the name of the Car Sales game.
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