GM Gambit on Below-Prime Lending is Low-Risk

GM Gambit on Below-Prime Lending is Low-Risk

By Bill Visnic July 22, 2010

General Motors Co.'s plan to purchase Fort Worth, TX-based auto-financing company AmeriCredit Corp. is firing speculation about GM's judgment in purchasing a finance operation that focuses on lending to those with less-than-perfect credit, but the numbers show GM's decision to hold little actual risk.

Although AmeriCredit's focus is on financing auto buyers with below-prime credit, financing buyers in that segment - and those with even lower credit scores - does not necessarily bring outsized risk. According to data from credit-information company Experian Automotive, the industry repossession rate was well less than 1 percent in the first quarter this year. And in the month of April, just 1.9 percent of all auto loans were in default.

Both GM and Chrysler Group LLC are anxious to increase their competitiveness in offering financing for buyers with less than ideal credit scores. While some will question GM paying $3.5 billion - a near 25 percent premium - for AmeriCredit, GM has said it needs to jump-start its ability to reach below-prime customers, which comprise about 40 percent of the market.

Moreover, the overall industry has seen a decline in lending to the below-prime market as credit availability in that sector has stubbornly resisted the easing the industry had expected with an improving economy. According to Experian, in the first quarter aggregate new- and used-car lending to non-prime, sub-prime and deep-subprime buyers dropped by 3.9 percent compared with the first quarter of 2009, while lending to the super-prime and prime credit tiers increased by 2.9 percent.

The deal also is expected to allow GM to turbocharge its diminished leasing business, as AmeriCredit will expand into leasing if the deal closes as expected in the fourth quarter. When GM went through bankruptcy and its former captive-lending unit Ally Financial struggled to contain damage from its exposure to sub-prime mortgages, GM's ability to provide competitive leasing deals became almost nonexistent. Currently, only about 7 percent of GM transactions are leases, compared to an industry average of approximately 20 percent.

 

Repossession-rate graphic courtesy Experian Automotive

Bill Visnic:  is an AutoObserver Senior Editor. Follow @AutoObserver on Twitter