How is the Sub-Prime Market Changing?
By Paul Snider
Having recently reviewed several studies regarding sub-prime financing, I thought this article should concentrate on how the market is changing and what impact it will have on dealers nationwide.
Consumer debt is on the rise. According to statistics from the SMR Research Corporation, based on information from the Federal Reserve Board, overall consumer debt is up to a record $6.3 trillion, of which $465 billion is auto debt and $572 billion is credit card and related debt!
From 1992 to 1998, personal bankruptcies were up 55%. Of 1.5 million households counseled, over 33% participated in a debt-repayment plan, and the causes of credit problems still come from the same four events as before-loss of job, illness, divorce and in some cases death.
The increase in "good customers with bad credit" has again created a rise in sub-prime lending, in particular auto financing. According to Federal Reserve Bank estimates, the sub-prime auto market has grown nearly fourfold over the last decade, from $15 billion to $65 billion in loans.
Advances in communications made it possible for sub-prime lenders to centralize aspects of their underwriting and collection efforts, which allow them to apply consistent underwriting standards to a large national portfolio of loans and use systems that can increase repayment prospects.
The Internet is a driving force behind the growth of this dynamic sector of the financial industry-and in fact, since online lending began in 1998, it shows no signs of slowing. By 2003 consumers will obtain $8.9 million in loans and credit cards over the Internet, representing more that $167 billion in receivables, according to Forrester Research.
What does all this mean to automobile dealers going forward? Privacy and security issues continue to be barriers for online lending; however, the technological advancements that increase availability of credit, combined with the decreasing cost of computing, make it easier for consumers to shop for lower cost credit, regardless of current ratings. Consumers now have greater control over their sources of financing, and by homogenizing rates and terms from many credit providers, multi-vendor online marketplaces will make it easier for consumers to compare products and quotes. This means that as dealers we must do a better job of following up on customers who apply via the Internet and toll free numbers.
Our marketplace is changing daily, but sub-prime customers will continue to seek sources of credit for automobiles. With the next downturn in our robust economy, a new group of consumers will emerge who previously had good credit but are faced with the fact that they are part of the over 50% of customers who are credit-impaired. Successful dealers will continue to keep special finance departments separate, invest in training and technology plus treat this growing market with respect and dignity to increase market share going forward. If you are not aware of this growing market, it is imperative that you become so now. The Internet has changed the way consumers get information and will bring new and exciting challenges and opportunities for dealers who are committed and hold staff accountable.
Paul Snider is President/CEO of CreditIQ.com Inc./VOISYS Systems Corporation of Clearwater, Fla., specializing in lead-generating services including 800 loan-by-phone and Internet applications. psnider@dealeronline.com
