2010 Auto Finance Survey

The worst may indeed be over. The information collected for Auto Dealer Monthly’s seventh annual Auto Finance Survey indicates that for many dealers, there’s a little more breathing room to be had than in 2009, and the industry is moving back toward a state of stability, albeit slowly.

Whereas last year saw a lot of dealers suffering as finance companies scaled back or exited the business, 2010 has seen a number of improvements. Data reflects a loosening of the market.  Franchise dealers saw both an increase in the number of finance companies available and the number of finance companies actually funding deals this year. However, without access to captive finance companies and some of the bigger prime banks, independents have to work harder to find and retain finance sources.
The biggest trend reflected in prime credit financing is the return of the captive finance companies. Last year’s results saw captives lose roughly 25 percent of their market share, while credit unions gained about 30 percent. In fact, back in January of 2009, the two held nearly equal shares of the market, a testament to both how weak captives had become and how much credit unions were stepping up to grab prime business. However, captive finance companies got aggressive with incentives in the latter part of 2009, remained strong and have been able to recapture their previous market share this year.

Of particular note is General Motors’ recent purchase of AmeriCredit, which officially became GM Financial on October 1, 2010. The game-changing move reflects the commitment and urgency of the captives to crank up their business following the capital market opening back up in mid-2009.

While captives have returned to holding the majority of prime credit business, banks are not far behind, though they have taken a small step back since 2009. Chase, Wachovia, Bank of America, Capital One Auto Finance and Citizens collectively hold over a third of the prime market. Credit unions seem to have taken the biggest hit over the past year, although this basically means their share of the prime market is simply returning to what it was pre-2009. However, it also means companies like CUDL that make their living from credit unions and enjoyed a lot of business last year are likely feeling the pinch now.

Along with increased availability of financing, another positive trend is the increase in down payments. Across the board – whether it’s in prime, subprime or dealer-based finance – the average down payment is up about $400 over last year.

One thing that remained unchanged from last year was fact that the majority of dealers reported the credit range of 620-659 as their lowest approvable credit score by a prime credit source. Then there was a much smaller number of dealers reporting the below-520 segment as the lowest score to be approved by a prime credit source. This indicates many dealers are able to get some of their conventional prime sources to buy their low-score deals, most likely as a result of their ongoing relationships with those finance sources and the volume of high-scored deals they submit. Dealers reported a gaping hole in their ability to finance a customer with a 520-619 score with a prime credit source.

Special Finance
Special finance is growing again in the dealership, as evidenced by an increase in average monthly sales. Even more encouraging is that average gross per SF deal increased by nearly $500 for both franchise and independent dealers.

Additionally, many dealers have more SF sources available to them this year. Franchise dealers, who in 2009 had an average of six SF sources available, reported having access to seven companies this year; they reported sending deals to five companies, up from four last year. Unfortunately, independent dealers still seem to be at a disadvantage in this area; the numbers remain unchanged from last year’s average of five companies available and used by independents. Thankfully for many, a number of finances sources are now signing independent dealers back up and have indicated they will continue to do so through the balance of this year.  For more insight on SF and the results of this year’s survey, see page 12 of the November 2010 issue of Auto Dealer Monthly.

Finance and Insurance
Finance product penetration has remained relatively stable over the last five years. That’s quite a feat given the fluctuations in not only the economy but also in finance company advances, which were down last year but have since rebounded. Regardless of what advances have been, dealers have been working hard at maintaining the same level of penetration. Of particular note is the increase in GAP by independents, up from 38 percent last year to 44 this year.

Another trend is an increase in menu selling. This year, 91 percent of responding franchise dealers said they were using a menu to present F&I products (up from 81 percent in 2009), and half of those reported using an electronic menu. Independents are moving toward a more standardized presentation with 46 percent reporting use of a menu; however, only a small percentage of independents reported using electronic menus.

While last year was the first in many years to see F&I income decline – and it did take quite a hit, thanks in part to the aforementioned lower advances – this year showed dealers recovering that income and generating more than before. 

Dealer-Based Financing
Recent changes to financial regulations have caused a high degree of uncertainty in the area of dealer-based financing (DBF). Interestingly, despite the knowledge that these changes will at some point impact the industry, no one seems to be changing their plans or hitting the brakes on their DBF operation just yet. All in all, this particular niche of the market has improved considerably over 2009.

It’s often been said that DBF is not about selling cars but rather about collecting cash in the form of both down payments and ongoing payments. Not surprisingly, many dealers working in DBF reported having a related finance company, citing the tax benefits. The average number of accounts on the books of responding dealers was nearly 500, and most dealers in that range reported keeping two full-time collectors on staff.

As far as funding a DBF business is concerned, about 40 percent of responding dealers are using asset-based loans. The larger the operation is, the more likely the dealer is to need this kind of backing to support continued growth.

There appears to be no middle ground this year when in comes to the apparent ease or difficulty in obtaining funding; responses from dealers reflected that it was either very easy or extremely difficult. Much of that may be due to dealers’ relationships with their finance sources. The task of acquiring additional funding is likely easier for a dealer who has enjoyed a long-standing relationship with a finance company, whereas dealers who lost their usual finance sources and were forced to seek out new banks likely found the process considerably more difficult.

Unlike 2009, when a significant percentage of dealers reported sales and collections were off from the same period the year before, this year one would be hard-pressed to find a dealer with negative news to report on sales or collections. In fact, no dealers reported collections as “worse” or “much worse;” instead, responding dealers were split almost equally between those who reported their numbers were similar to last year and those who reported them as “better” or “much better.” Only about 15 percent reported a decrease in sales.

This year about three-quarters of dealers handling DBF reported selling some type of extended service contract, whereas last year just over half did. Knowing customers often don’t have the extra cash to pay for maintenance and repairs, most dealers are likely deciding that their own interests are best served by offering a service contract or warranty on each vehicle sale. It helps the customer control costs and keeps the vehicle running, which in turn will keep that customer paying.

An emerging trend in DBF is the presence of higher ACV vehicles and longer terms; improved collections have instilled many dealers with the confidence to put more-expensive vehicles on the road. The majority of dealers are using a payment protection device of some sort, whether that means GPS location, starter interrupt or dual devices. It appears the use of GPS-only devices is on the upswing, likely due to ease of repossession and the resulting cost savings.

Vol. 7, Issue 11