New SF Customer Profile is Reshaping Upper-Tier Programs

As my friends in the executive management level of special finance companies will tell you, I am continually querying them as to what the profile is of their average loan currently being booked. They know I don’t ask to just be nosy, nor will I publish any specific information they divulge. I ask in order to monitor the trends of the SF industry, share an aggregate of the blends, as well as help dealers match their inventory and practices to how the finance companies are currently buying.

As those who attended the SF conferences recently held know, I also extensively poll dealers. Each year, conference attendees’ operating data is gathered to augment the data of the clients I train and consult to create the annual SF benchmarks and averages. This year, for the first time, I asked some select high-volume SF dealers who do an excellent job of tracking to provide some additional data—the characteristics of their own SF sales categorized by the same credit tiers and niches.

Since 2000, when I started tracking the data, the industry averages for the four special finance credit tiers and three credit niches have remained much the same over the years. In 2009, tight capital and economic uncertainty created a significant shift in loan profiles, which was the first shift in the decade. The trend was downsizing.

The Big Six – AmeriCredit, Capital One Auto Finance, Chase Custom, CitiFinancial Auto, Santander Consumer USA – plus Regional Acceptance all reported shorter terms, lower amounts financed, lower payments and higher interest rates. In 2009, the average amount financed, even with Cash for Clunkers pushing new vehicle sales, was in the $15,500 range for what I consider the top-tier SF companies, and the average payment was hovering just above $400 per month, with most just below that mark.

What a difference a year makes. In 2010, as capital markets have eased up and with finance companies facing both pressure to grow their portfolios and competition, interest rates have dropped. The aggregate rates have dropped from 19.5 percent APR in 2009 to 16.8 percent APR, as reported by the finance companies, with some companies dropping by nearly 4 percent.

At the same time, the average loan term has grown again, to the point that the average loan for the tier-one SF companies now extends to almost 69 months as compared to just over 66 months in 2009.

With the fact that interest rates have dropped and terms have been extended, the logical conclusion would be that the amount financed would have grown commensurately. However, that is not the case. The average monthly payment has jumped to nearly $427, an increase of over $22 per month from 2009 and a jump I haven’t seen in the past decade.

The foregoing data means the average amount financed has increased substantially. The average amount financed for all customers (across all SF credit tiers), as reported by the finance companies, has grown to $18,268, with one company reporting almost $19,000 as its average amount financed!

What does this mean for SF dealers and departments? It certainly indicates a substantial shift in inventory being sold to the top two credit tiers of SF consumers. Working from the average amount financed (and assuming the down payment equals the sales tax and fees charged, $2,500 in service contract and GAP products were added, and the industry average front-end gross profit of $1,512 was made), that would mean the average inventory cost would be about $14,250.

Additionally, when drilling down to what I call tier-one special finance credit (near-prime, as described by the banking world), dealers are reporting that the average amount financed is nearly $23,500 with an average term of 71 months. Similar math would indicate that the average inventory cost of this credit tier would essentially be $19,500! While over the years it has been common for deals to occasionally reach this level, to average it is quite a different story.

My interpretation of this shift is that the special finance world has seen the entry of a new breed of consumer. With the wide-spread collapse of the real estate market, dealers are reporting a significant increase of buyers who have enjoyed excellent credit over the years, but have become saddled with badly-depreciated real estate, leaving them under water in homes they could not afford to pay for. Generally, the members of this class still have good jobs and income. They have a taste for vehicles with higher content and desirability and have more cash available for a down payment and the income to support higher payments.

There has even been some movement within the Open Chapter 7 bankruptcy niche. Again, a factor in this could well be the above-mentioned consumers who have been through a real estate foreclosure or short sale and have flushed their deficiency balances. In particular, some of the larger finance companies serving the Open Chapter 7 bankruptcy niche have experienced the same trends as previously noted. While the term of the loans have not changed, the average amount financed has moved up by $750 to nearly $16,000, and the average monthly payment has grown by $25 per month to over $405 per month.

Now, for a word of caution. The loan characteristics of the lower SF credit tiers (what I term tier three and tier four), have not changed markedly. It is important for dealers to know what percentage of each of the SF credit tiers make up their customer base before running out and buying substantially more expensive inventory for their department. While it is certainly easier to sell a near-luxury vehicle to a SF customer, if the makeup of your customer base indicates only 10 percent of your customers fall into the tier-one/near-prime area, you certainly would not want 50 percent of your SF inventory to be skewed towards the pricier, near-luxury vehicles.

Elite SF dealers have always maintained a watchful eye toward the demographics of their credit applicants. They manage their businesses by monitoring the makeup of their customers, knowing the finance companies that serve them and matching their inventory supply to the need of each credit tier and niche. Knowing the makeup of your dealership’s credit demographics and keeping up to date on finance company trends should certainly help keep you a step ahead of your competition and maximize the opportunity for your department.

Vol. 7, Issue 9