Subprime auto loans have been in the headlines over the past couple of years with concern that we are headed into another credit crisis abyss. Rising defaults and delinquency rates are cited as predictors of that impending doom.
Cheap money and a strengthening economy helped drive up the number of auto loans to $1 trillion in 2015. That value now sits just shy of $1.23 trillion, about double what it was in 2003.
Make Sure Buyers Can Afford Your Cars
Delinquencies have risen along with the loan values. According to the Federal Reserve Bank of New York, the number of borrower’s delinquent 90-plus days increased to 4.26 percent in the first quarter of this year. In 2005, that figure was at 1.99 percent before rising to a peak of 5.27 percent five years later. The rate dropped for a few years but started rising again in 2014, New York Fed numbers show.
Fitch Ratings’ Auto Loan 60+ Delinquency Index shows subprime loans hitting 5.74 percent in February, a higher level than during the height of the last recession.
These types of numbers should scare dealers into ensuring that they are putting buyers into cars they can afford. More conscientious ones do make sure that their repossession risk is lower by validating income of buyers and selling them a car that fits their budgets.
But there are plenty who don’t. They inflate incomes and power book vehicles to put the deal together. They do it without much thought and little do they realize that the dealer is on the hook, will have to pay full recourse if the vehicle is repossessed by the bank and the income is misstated.
Lender agreements have been changing for the past couple of years, according to Wolf Richter, CEO and founder of business and financial information website Wolfstreet.com. Citing the Fed’s Senior Loan Officer Opinion Survey, he wrote last November that banks have been slowly tightening lending standards for both prime and subprime auto loans. The latest survey released in April noted the tightening has continued.
This tightening followed years of loose underwriting guidelines, which fueled auto sales and caused the big rise in auto loan balances.
Delinquencies, defaults and smaller margins have had an impact on lenders. In April, we saw a couple of small subprime lenders file bankruptcy – Florida-based Summit Financial Corp., which had Bank of America as a lender, and Atlanta-based Spring Tree Lending.
SubPrime Loans are Tightening
There are a host of reasons for tightening on subprime loans. One is reduced risk tolerance. Another is a less favorable view of used auto values.
As the tightening continues, dealers need to take more responsibility to ensure that they aren’t part of the problem.
A new company called TurboPass launched this year that could make validating income easier and more accurate. The Texas company has a website – www.nostips.com – that gives dealers and lenders an automated way to do traditional asset and net income verification.
Basically, the company took what it had been doing for mortgages and applied it to auto loans. This avoids stips. This will help drastically cut down on CIT (Contract-In-Transit), which can cost the dealer up to an average of $32.00 in holding costs alone.
It also will help reduce the time it takes the F&I manager to chase stips for funding and or re-contracting caused by inaccurate information. Every time a customer has to be re-contracted, the dealer stands the chance that back-end products get cut. The customer simply doesn’t want to increase the payment in lieu of taking advantage of the service contract or ancillary products.
TurboPass may be challenging for some F&I people to embrace, especially those who see the advantage of collecting stips directly from the customer, even if it means they could have been altered to obtain bank approval.
Removing the Guess Work
But dealers who aren’t keen on doing subprime loans to begin with may appreciate this alternative. It removes the guess work. Once the customer passes the TurboPass inspection, the financing is approved and the dealer doesn’t have to be concerned about funding delays.
Subprime deals tend to go awry before they get into the F&I office. Training sales managers on subprime desking procedures is an essential part of ensuring that the customer is put on a car that fits within their budget. The F&I manager should meet the customer earlier in the process, conduct a credit interview, find out what’s happened, what’s changed and why it won’t happen again.
The idea is to get the story behind the slow pay history for the lender. The story may even get the deal approved. Not all lenders buy a FICO score. They want to hear the story. Always validate proof of income. Get a copy of the customer’s paycheck and proof of residence.
Also, be prepared for the bank to conduct an interview with the customer. So, make sure you’ve gathered all of the facts. Make it a point to properly book out the vehicle. Don’t leave anything to chance.
Value of Self-Desking
Today, many customers now look to not only shop for vehicles online but also finance online. Giving the customer the option to self-desk online at the dealer website or onsite helps ensure the customer ends up on the right vehicle the first time out.
Self-desking allows the customer the flexibility to obtain pre-approval and determine the payments based on credit criteria prior to coming into the dealership. It avoids the customer landing on a vehicle they won’t be able to qualify for based on credit or budget. And, it will dramatically increase profits and speed up the delivery process. Subprime customers don’t want to be dragged through an all-day process at the dealership when buying a car.
A subprime customer can be the most loyal customer. Rest assured, the customer will be back to buy another vehicle at your dealership down the road if they are treated right and not put on a car in which they can’t afford the payment and ultimately end up giving back.
With the headlines blaring that a crisis in subprime auto loans is looming, dealers can be a part of the solution, by making sure that the customer is put on a car they can afford. This lowers the risk of repossession and keeps the customer in the car, which leads to more repeat business.