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Auto lenders approve more subprime borrowers
By G. Chambers Williams III • THE TENNESSEAN • January 4, 2011

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Twitter FarkIt Type Size A A A Next Page1| 2Previous PageAs the auto industry continues to make a slow recovery from tough times of the past two years, lenders are finally loosening credit restrictions and approving car loans for customers with less than prime credit ratings.




In the third quarter last year, for instance, the share of new vehicle loans to "credit-challenged" consumers rose 12.7 percent compared with the same period in 2009, said Experian, one of the nation's major credit reporting agencies.
Loans to borrowers with subprime credit scores as low as 550 were among categories that grew the most.
The shift comes just as new car sales are picking up momentum. While the official tally for U.S. automobile sales in 2010 won't be out until this afternoon, analysts say full-year deliveries probably rebounded to about 11.5 million vehicles from 10.4 million in 2009, bolstering industry confidence in consumers' willingness to buy despite economic uncertainties.
"Right now, what we're seeing is growth in auto lending across the board," said Jeremy Anwyl, CEO of the auto research Web site, Edmunds.com. "There is a lot of money sitting out there and very few ways for investors to put it to work. What those investors are realizing is that there is money to be made in subprime auto lending."
For Middle Tennessee car dealers, the easier credit has helped boost sales.
Credit restrictions were the biggest reason people stopped buying new cars during the recession, but "that's not a problem anymore," said Marty Horn, sales manager at Nashville's Crown Ford.
"We're not having any trouble finding financing for anyone with a score in the 600s," he said. "We can get most people financed through Ford Credit, and if that's not available, we have other lenders ready to step in."
Terms are getting back to normal, as well as loan-to-value ratios, basically how much money a lender will advance on a vehicle compared with its book value.
"We're seeing loans of up to 140 percent of value from some lenders, and Capital One is by far our best lender for the subprime customer, which is below a 620 score," said Michael Creque, general manager of Alexander Chevrolet-Cadillac in Murfreesboro.

Next Page1| 2Previous PageAs the auto industry continues to make a slow recovery from tough times of the past two years, lenders are finally loosening credit restrictions and approving car loans for customers with less than prime credit ratings.


In the third quarter last year, for instance, the share of new vehicle loans to "credit-challenged" consumers rose 12.7 percent compared with the same period in 2009, said Experian, one of the nation's major credit reporting agencies.
Loans to borrowers with subprime credit scores as low as 550 were among categories that grew the most.
The shift comes just as new car sales are picking up momentum. While the official tally for U.S. automobile sales in 2010 won't be out until this afternoon, analysts say full-year deliveries probably rebounded to about 11.5 million vehicles from 10.4 million in 2009, bolstering industry confidence in consumers' willingness to buy despite economic uncertainties.
"Right now, what we're seeing is growth in auto lending across the board," said Jeremy Anwyl, CEO of the auto research Web site, Edmunds.com. "There is a lot of money sitting out there and very few ways for investors to put it to work. What those investors are realizing is that there is money to be made in subprime auto lending."
For Middle Tennessee car dealers, the easier credit has helped boost sales.
Credit restrictions were the biggest reason people stopped buying new cars during the recession, but "that's not a problem anymore," said Marty Horn, sales manager at Nashville's Crown Ford.
"We're not having any trouble finding financing for anyone with a score in the 600s," he said. "We can get most people financed through Ford Credit, and if that's not available, we have other lenders ready to step in."
Terms are getting back to normal, as well as loan-to-value ratios, basically how much money a lender will advance on a vehicle compared with its book value.
"We're seeing loans of up to 140 percent of value from some lenders, and Capital One is by far our best lender for the subprime customer, which is below a 620 score," said Michael Creque, general manager of Alexander Chevrolet-Cadillac in Murfreesboro.

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GM eases standards
General Motors' dealers are making use of Ally Financial, the now independent lender that used to be GMAC, as well as GM Financial, the new GM-owned subprime lender formerly known as AmeriCredit. GM bought that company in July to provide its dealers with more lending options for non-prime customers.




"Ally will take anything from 620 up, but we even got a customer with a 587 score approved last month with Ally," Creque said.
Two factors are helping rebuild confidence in non-prime and subprime lending among investors: higher used-car values, which help lower the risk if a vehicle has to be repossessed; and lower default rates among borrowers, the dealers and credit experts said.
Auto-loan delinquencies dropped significantly during the third quarter, Experian said, with 30-day defaults down 8.4 percent from the same quarter in 2009, and 60-day late payments down 17.4 percent.
In addition, the total amount of auto loans considered at risk for default dropped by $6.4 billion during the quarter.
"With delinquencies down and less money in their portfolios 'at risk,' lenders can be a little less conservative in their lending strategies," said Melinda Zabritski, director of automotive credit for Experian.
Buyers start to return
Buyers are coming back, and they're starting to realize that credit "isn't anywhere near as tight as it was 18 months ago," said Ben Freeland, president of the Freeland Chevrolet Superstore at Hickory Hollow. "It's not crazy like it was at the peak, but we can get financing for people with scores anywhere in the 600s, and can even go into the upper 500s with the right conditions — decent employment and a good down-payment."
Freeland said lenders haven't thrown the spigots too wide open, though, and he doesn't see a risk of delinquencies spiking higher.
"They are doing more due diligence than they did before, looking for more documentation, such as pay stubs," he said.
The loosening of auto-lending standards remains a "sort of slow, tentative, step-by-step improvement," Edmunds.com's Anwyl said.
Lenders are looking more closely at debt-to-income ratios, and car payments generally must be where lenders feel comfortable — at no more than 20 percent of an applicant's income.