The Future of Auto Finance

The auto finance industry is going through some dramatic changes. Auto finance has always been a cyclical business with periods of prosperity and periods of challenges. Over the last year, there has been a significant change in the market relative to having auto finance as a key strategic growth area for many financial institutions. Many of the major non captive auto finance companies have either exited the business or determined to move forward as a niche player with much lower originations. The change of heart by some of these players is due to high losses, funding concerns, and just the shear volatility of the auto finance business. It seems as if no one likes the auto finance business today or its prospects in the medium term. Where is the industry going and how/who will make up the volume of loan originations that has been lost over the last year? Will a new national auto finance company emerge that has funding and that a strategic desire to make a commitment to auto finance?

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Permalink Reply by Victoria Fierson on October 1, 2008 at 3:24pm: The credit crisis is clearly affecting all businesses across all industries. Financial lending institutions may view auto finance as posing more risk than other industries, such as home mortgages. I am not sure if it is a question of liking the auto finance industry or not, but rather the level of risk the financial institutions would take on with auto finance loans. The economy and the state of the financial system over the course the next couple of months will determine the necessary steps needed to make up loan losses and whether or not there is market wide need for a national auto finance company to fund loans.; ▶ Reply to This

Permalink Reply by Tim_Cleveland on October 1, 2008 at 4:36pm: A division of the company I work for has longstanding relationships with many of the regional and national auto finance companies. They say that the originations at these organizations are plummeting, but picking up some of the slack are local credit unions. It will be interesting to see if the CU's become the auto lender of choice while the banking and finance institutions continue to struggle with their approach to this market. So the question I have is, Is there a need for a national company or might the combined capacity of the local CU's suffice for the time being?

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Permalink Reply by Victoria Fierson on October 1, 2008 at 5:00pm: Tim you're right. I've had many conversations with dealers recently about the credit freeze and loan availability. What they're telling me is that many applicants with lower credit scores that no longer qualify for loans through financial institutions are being told to go through credit unions. I think it is definitely possible that credit unions will become a popular alternative if credit standards continue to tighten. I'm also hearing that dealers are asking customers to put more money down to better qualify for loans. This makes me think that at the end of the day dealers want to make the sale and whether its through a credit union, financial lending institution or national auto finance company its going to happen.; ▶ Reply to This

Permalink Reply by Tim_Cleveland on October 1, 2008 at 8:04pm: Victoria:

You're right about the down payment as well. What our folks are hearing is that they want "real money down" so manufacturer rebates and incentives are NOT acceptable down payments. Even putting the down payment on another credit facility like a credit card or HELOC is less than ideal. They want cash, coming out of you savings or checking account as the best indicator that you will pay the loan out. But like you said, the dealers are starving as well so they are doing what they can, like calling in personal favors to get deals done. I hear tell they are relying on manufacturer incentives to the dealers for getting the fannys in the seats instead of profit above the invoice price as their means of getting paid. Positive repsonses to manufacturer post sale surveys are also very important these days I hear.

Interesting times to say the least. Remember when a guy who had $3500 available credit a credit card, a 600 score and 6 months on the job could drive off with a lease on a Mercedes? Not hearing much of that any more.

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Permalink Reply by Brian Reed on October 2, 2008 at 10:04am: I think all the comments thus far are in line with some of my thinking. It is clear that there are much fewer lenders of sub prime/non prime loans and that will not be made up by credit unions that are predominantly prime lenders. Credit unions can make up for some of the reduction in the prime space but I still think is more demand than supply of loans available in the prime space. This results in higher margins and less aggressive terms of approval by those lenders approving prime customers. One of these days, the liquidity/funding issues for lenders will improve and with the current margins in the market, it can provide much better margins for lenders than what they were booking 18 months ago. My point is that with many current lenders cutting not only into muscle but into bone, it will be difficult for them to turn their engine back on and start originating loans again. This applies to the full credit spectrum from sub prime to super prime. I think ultimately this will result in new lenders entering the market and the auto finance landscape in 2 years from now will look much than it looked 1 year ago.; ▶ Reply to This

Permalink Reply by Victoria Fierson on October 2, 2008 at 9:53am: There's an interesting article in the WSJ this morning discussing the 15-year low in U.S. September auto sales. "Toyota Motor Corp. sales fell 32.3% in September. Honda Motor Co. dropped 24% and Nissan Motor Co. saw its North America sales tumble 37%. I would imagine the number the people crossing the T's and dotting the I's at the Mercedes dealerships are probably a few less also.; ▶ Reply to This

Permalink Reply by James Mouton, PMP on October 2, 2008 at 4:55pm: I have been considering purchasing/financing a "pre-owned-certified" BMW 6 series. Credit is good and 10% down payment is no problem. Any thoughts on whether now is a good time to get a great deal (with sales down) or should I wait a few months?; ▶ Reply to This

Permalink Reply by Laurie Kight on October 3, 2008 at 2:32pm: This is only my guess, but I imagine that consolidation of all the minor (and some of the major) players will continue, and only those organizations with strong bank backing or other creative ways of securing liquidity will make it. So much hinges on how long it will take for the securitization market to be back in action. Until that happens, there are many players who will lose simply because their time and funds will run out. Sadly, these may have been companies that were run fairly well and had interesting programs to offer dealers. Some, however, will have no choice but to sell.

Even when securitizations return, it will be a different atmosphere. Will the appetite be there to invest in auto finance? I sure wish I knew!; ▶ Reply to This

Permalink Reply by DOUG SIGMON on February 17, 2009 at 3:59pm: as consolodation continues to occur, it also opens up a wide market for both new prime and subprime finance companies to set up and do extremely well. i';ve seen an 80% decrease in my auto lending clientelle with consolidation and outsourcing or collection technology but i am now in 08 and 09 starting to see a dramatic increase in privately backed auto lenders setting up business on a regional level to fill the gap that the captives and larger institutions and finance companies have left on the table. people will continue to purchase cars, it just may not be a 2009 dodge 1500 or a new mercedes.. there still is a tremendous amount of auto lending going on under the radar of everyone, almost entirely under the 30k$ amount per unit.; ▶ Reply to This

Permalink Reply by Scott J McKim on October 6, 2008 at 12:04pm: Brian, I think the term "dramatic" may be an understatement. Substantial events this year include the "credit crisis," $4+/gallon fuel and fuel shortages, large losses by the domestic manufacturers, plummeting residual values, a clog in the auto-backed securities market, and large decreases in the sales of new autos. Each one of those events is impacting the others in some way.

I think it is safe to assume that selling 17+ million new light vehicles in the US may not happen again for a very long time. The domestic captive finance companies have left leasing, one of their most powerful pull-ahead tools. Many import brands allowed their portfolios to migrate to larger trucks and SUVs, but the market for these models has effectively collapsed. The imports are better positioned with CUV and car models that still are in demand, while the domestics may be more than a year away with new models.

My observations in the prime auto lending/leasing business for the past eight years have included banks cutting rates to earn business/market share and offering enhanced residual values on leases to do the same. Both are business sins. In this decade many bank lenders have entered the business or expanded aggresively, only to see their financial health turn sour later on. Coupled with residual value gambles, the risk of losses on the horizon have forced many players out. Even BMW has taken sizeable residual write-downs this year (so now may be a good time to pick up a CPO'd 6-series).

For banks and finance companies who remain, I think there is a solid business opportunity. We may be able to stabilize our margins for the first time in years. I think leasing will see renaissance as a car buying option, appealing as it should to the right buyers, not just another pull ahead tactic.; ▶ Reply to This

Permalink Reply by JJ Hornblass on October 6, 2008 at 12:15pm: I agree with you fully, Scott. The only addition I would make to your comment is that I see a slight legacy advantage to the auto market from the pull-ahead effect of leases already written. Over the next couple of years I can see those existing leases acting to pull-ahead sales and perhaps softening the downturn in car sales until the true return of the auto market to those 17 million levels. To what degree will that soften the downturn? I'd have to work up some numbers, but my hunch is that those leases will help.; ▶ Reply to This