Frequently I have been asked to provide a brief overview as to what direction the sub-prime industry is headed. In this column I will address what I call the "swinging pendulum" of our industry and where it is today.
We are starting to see the re-emergence of the dealer-controlled finance company as a component of a dealer's sub-prime finance operation. During the 1990's we witnessed some dramatic shifts in options available for auto financing with respect to non-prime consumers. It almost seems like ancient history, the days when the only option for an individual with damaged credit was to purchase and finance a vehicle from a buy-here pay-here dealer. It was a period when buy-here pay-here dealers had the option to pick and choose from the pool of credit-disadvantaged customers and hopefully identify the keepers and pass on the undesirable risks. During those times there was really only one game in town for non-conventional auto financing. Then the pendulum started to swing.
The pendulum shifted dramatically to the opposite side from 1993 through 1997. It shifted to the business of the sub-prime finance company. Sub-prime lenders had money aplenty and were giving it out. Those lenders became the scorn of the buy-here pay-here dealer who was no longer the only option for auto financing. Some of the fallen lenders made hundreds, even thousands of loans to unqualified, poor credit risks. Some lenders tried to "outgrow" the losses. The buy-here pay-here dealers knew that game wouldn't work. You can't outrun your losses; eventually, they catch up with you.
Now we see the pendulum returning to the center point. The sub-prime lending market has tightened up somewhat. We are hearing many buy-here pay-here dealers report an increase in the quality of applicants they are reviewing. As sub-prime lenders are becoming slightly more conservative, more customers are returning to the buy-here pay-here dealer for financing on a moderately priced, dependable vehicle. Opportunities are returning for buy-here pay-here dealers who have pulled through the tough times. Many of these dealers are reporting sales increases of ten to forty percent over 1997. Has the pendulum moved?
From our perspective the answer is yes, it has moved. We meet with our twenty group clients and hear the same message week in and week out. Special finance departments are feeling the lenders tighten credit guidelines and pricing. Sales volume is not quite as easy to come by. Buy-here pay-here dealers are reporting an improvement in the quality of paper they are booking. The pendulum is moving back.
Plus there is a whole new segment of the buy-here pay-here marketplace the sub-prime finance company repossession. Sometimes these customers had difficulty paying XYZ Finance Company headquartered at the other end of the country; however, they pay the local buy-here pay-here dealer just fine (or lose another vehicle). Dealers are discovering a number of these customers were put in vehicles out of their price range with no hope of making $400 plus payments per month. One dealer recently told me about a customer who allowed for a voluntary repossession because the car payment of $640 was more than her rent. She wanted something under $400 per month!
It seems we may have struck some balance in this crazy market. The pendulum seems to have returned to a center point with enough room in the marketplace for both the sub-prime finance company and the buy-here pay-here dealer. We believe the opportunities for the dealer who finances his/her own vehicles will continue to grow during the next two to three years. Beyond that, who knows where the pendulum may swing.
Chris Leedom is a Professional Twenty Group moderator with NCM Associates, Inc. in Overland Park, Kansas. If you have specific questions or require more information about this subject, please check the appropriate box on the reader response form on page 3.