Divided by Credit Scores, Buyers' Experiences Diverge Even More
By Michelle Krebs October 28, 2008By Dale Buss
Lender executives insist that every auto-loan deal is as individual as we are, so there remain lots of variables in the market. But here's how the auto-lending environment has changed for each of three broad tiers of American consumers:
Prime borrowers: These are the folks who have credit scores good enough even for GMAC, which earlier this month specified that only a tally of 700 would be good enough to obtain a loan.
The very cream of the crop can still get the car and the deal they want and terms just as favorable as ever, "but these are the real exceptions now," said Ellsworth "Ellie" Clarke, president of Bank of America Dealer Financial Services, in Jacksonville, Florida.
Even for most of this top tier of borrowers, required credit scores for favorable terms typically have risen to 720 from 700, said Jesse Toprak, executive director of industry analysis for Edmunds.com. A FICO score of 620 typically defines prime borrowers.
And lenders and dealers said that even prime-cut borrowers may be reduced to deals of no longer than 66 or even 60 months compared with the previous 72 or even 78 months.
As a result, approved auto-credit applications by the best class of American borrowers declined from 91 percent to 81 percent in September, compared with January, CNW Market Research data show.
Average consumers: These are best understood as typical borrowers without a specific moniker attached to them -- that vast swath of Americans whose balance sheets and financial habits put them squarely in the middle of the population, comprising most individuals.
These borrowers now are qualifying for less vehicle in exchange for the same payment, said John Garcia, the F&I manager for Russ Darrow Kia and Chrysler dealerships in Madison, Wisconsin. Approved applications declined from 86 percent to just 77 percent for this "near-prime" category of borrowers in September compared with January, CNW said.
To get the best terms, this group may have to put 10 percent or even 20 percent down on a vehicle -- whereas a year ago, or even six months ago, that wouldn't have been required, said Jack Gillis, director of public affairs for the Consumer Federation of America and author of The Car Book, an annual guide to car buying.
"They also need to be willing to pay the car off in five years versus six or seven before," said Clarke.
Another loan-industry analyst said that, whereas average borrowers had "some negotiating room" before, dealers now "have really tightened it up." James Royal, director of marketing for Informa Research Services Inc., in Calabasas, California, said that "if you don't have the best credit score or not enough of a down payment, you might have had wiggle room in the past, you don't have it now."
Subprime buyers: This much-maligned group -- whose woes in the U.S. mortgage market have been broadly blamed for knocking the world financial system off its pins -- now face lots of extra obstacles as auto companies and lenders pick through their applications much more carefully these days. Approvals of applications from subprime borrowers in September crashed to 23 percent, from 67 percent in January, according to CNW.
"To begin with, the leasing option probably is eliminated for them," said Bank of America's Clarke. "You can still get a loan as a subprime borrower, but you have to be the best of subprime borrowers to get that loan. Subprime lenders now are tiering even within the subprime group whom they will lend to and whom they won't."
For consideration of a purchase loan, the minimum credit scores for these consumers now are around 550, Toprak said, "otherwise [lenders] won't even look at the application. Most subprime lenders used to at least take a look at the application regardless of the score" a couple of years ago, he said.
So these borrowers now may have to really scrounge for financing, switch to a less-expensive vehicle than they had hoped, or come up with a much bigger down payment -- at least the 10 percent to 20 percent more that also now is required of average borrowers.
"They can get credit," Gillis said, "but they'll have to pay more for it than in the past, and it will be almost impossible to get zero-down or very low down payments," Gillis said.
Clarke said that subprime borrowers now typically are facing 60-month limits on auto loans instead of the previous 72-month terms.
This situation, of course, represents a drastic turnabout from the abruptly concluded recent era during which bankers routinely sought to cover the higher risks involved in a subprime loan simply by charging stiffer terms. "Charging more in accordance with risk is what got them into trouble with the subprime market," Royal explained. "If just having it on your books is bad, now it doesn't matter if you can make more over the long term."
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