Still-Unsettled Credit Environment Little Help for Limping Auto Sales
By Bill Visnic July 6, 2010One factor pundits most often cite in the formula for reviving auto sales - not to mention the general economy - is the need to once again open up credit after the near-absolute credit shutdown in late 2008 and much of 2009.
While easing credit almost surely would help industry effo rts to sustain some type of sales recovery, one auto-lending expert says it's inconclusive as to whether that's actually happening. At the least, a still-ambiguous credit environment is yet another drag on what, at this point, was expected to be an auto-sales revival in full swing.
The current situation in the credit market likely is one reason why Chrysler Group LLC and General Motors Co. have been making noise about more actively courting buyers with sub-prime credit, said Melinda Zabritski, director of automotive credit for Experian Automotive. With general access to credit still spotty, dollars directed to sub-prime loans dropping and overall auto sales oscillating around barely sustaining levels, GM and Chrysler are anxious to tap into buyers presumably shut out of the market because of their credit scores.
Credit Easing?
But the big question for some time has been a simple one: is it getting easier to get an auto loan? In the darkest days of the recession, few Americans were buying, regardless of their credit standing, but those who were needed ultra-solid credentials. Experian's Zabritski said the current credit market has climbed from those depths - but she still stops short of saying credit has been loosening to an appreciable degree.
Ivan Drury, industry analyst for Edmunds. com, points to the industry's continuing downward trend of average annual percentage rate (APR) for auto loans as evidence sales still are going mostly to buyers with good credit. In January 2008, for example - when the recession had just begun - the industry-average APR on auto loans was 6.9 percent. By June, 2009, the average industry APR had plunged to 4.7 percent.
And so far this year, evidence suggests credit remains tight.
"It's a cyclical market," Zabritski told AutoObserver. "It's very seasonal. The earliest months and the last quarter are the loosest." But, "there are a lot of things going on," that have kept the lending environment from being one of steady rebound, she said.
Take, for example, the fact that first-quarter total outstanding auto-loan balances (which includes loans for used vehicles) were down by nearly $50 billion compared with first-quarter 2009. Zabritski said the drop is attributable to many factors beyond what might be generally assumed to be a still-tight credit market. Although "captive" auto finance units often are believed to have the most liberal credit standards, captive financiers actually lost the most during the period.
Zabritski said that new-vehicle financing did appear to have been tighter in the first quarter - at least for borrowers with less than spectacular credit. Of the five major credit categories (deep sub-prime, sub-prime, non-prime, prime and super-prime), only auto loans for buyers at the highest tier, super-prime, increased compared with the same period last year. 
Deep sub-prime, sub-prime and non-prime loans collectively dropped 6.3 percent in the first quarter, while prime and super-prime loans collectively increased 1.4 percent.
Super-prime and prime tiers also were the gainers in loan distribution for all open auto loans (which includes used-vehicle loans) compared with 2009 and Experian's data show a trend favoring good-credit loans since 2008. The shift is the result of the "increase in the last few years in the number of prime loans coming on the books" because of credit tightening during the recession, Zabritski said.
Deep (Prime) Diving
Chrysler and GM are aware of this trend and have identified deep sub-prime and sub-prime borrowers as a market that might help generate the increased sales volume they need to fuel their post-bankruptcy revivals. Sub-prime buyers comprise about a quarter of all auto loans, but GM gets perhaps 5 percent of its business from sub-prime buyers.
General Motors has said credit standards from its partly-owned and preferred lending partner, Ally Financial Inc. (formerly GMAC LLC) have limited its ability to finance sub-prime customers and the company is looking for an alternative - one that may or may not include an attempt to reconstitute its own captive-finance unit, an advantage it gave away when selling off its controlling interest in Ally. 
Chrysler took quicker action, announcing in May a venture with Santander Consumer USA Inc., a subprime specialist, to broaden Chrysler's access to funding for sub-prime buyers. Although critics pointed to GM and Chrysler's pursuit of more sub-prime paper as a return to the risky strategies that helped cause the economic meltdown, Zabritski said it shouldn't be perceived that way at all.
"You have lenders who understand sub-prime and do it very well," Zabritski said. "It makes sense to partner" with those specialists, she agrees.
Other Trends Of Note
In her report about first-quarter auto-financing trends, Zabritski also mentions that although the total of all open auto loans (new- and used-vehicle) dropped by almost $50 billion, the average amount financed increased for almost every credit tier.
And the top 20 lenders in the new-vehicle sector, accounting for more than 80 percent of all financing, mostly saw improved share, including drastic jumps for GMAC (150.6 percent), which had exited almost all purchase and lease lending for many month last year, and Hyundai Capital America, the captive-finance unit for Hyundai Motor America and Kia Motors America, which leapt 232.8 percent and reportedly also is cranking up efforts to increase its presence in the sub-prime sector as well as increase leasing deals.
The captive lenders' impact on the lending market is outsized compared to the their market share, Zabritski said, but said the captives are beginning to regain share.
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Easy credit is a mistake. Not only does stricter credit standards help prevent another meltdown, it also helps tame and reduce American Consumption.
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