Summary
In a previous GLG News article we discussed the potential advantages GM and Chrysler dealers might have over Ford by gaining more access to floorplan and retail loans through GMAC. Turns out, it's not working out that way.
Analysis
Automakers and dealers are using rebates, discounts and other discounts to lure customers back into their showrooms. In fact, the average incentive on vehicles sold in May was at an all time high.
Dealer clients have experienced an uptick in floor traffic and closing ratios in the first ten days of June. However the difference between closing a deal and making the delivery is crucial. That's where the problem is.
Some lenders have said in recent months that they would try to make more deals. After GMAC received TARP money, the auto lender announced plans to consider applicants with lower credit scores (over 621) and make $5 billion available for auto loans.
But despite having lower standards, GMAC still originated just $3.4 billion in loans in the first quarter, down from $13.i billion in the same period last year.
GMAC even claims to be "looking" at applications form customers with scores below 620.
Of course, "looking" is not buying. Even deals that are "approved" are approved with so many stipulations the dealer is unable to finalize the deal. The "conditional approval" is the new watchword for lenders.
The financing environment for auto buyers has been tough since 2007, when the credit crunch slammed the brakes on new contracts and virtually eliminated the leasing option for Detroit Three customers.
From the beginning of 2007 until the present time approval rates for prime applicants, who have credit scores above 750, fell from 95% to 80%. Subprime applicants were worse off-just 17% are being approved, down from 66% in 2007. And, as mentioned earlier, many of those "approved" cannot meet all the tougher criteria lenders have imposed.
Dealers with access to captive lenders of foreign automakers like Toyota, Honda and BMW are faring better than their American counterparts. These captive units, which are tied in to manufacturers, seem to be more invested in doing deals.
Until recently, auto financing was a growing industry, expanding beyond automakers captives to banks and subprime lenders. Since the credit crunch many new entries have dropped out or gone out of business. Defaults among lenders are at 13%, up from 11% in March.
As banks and subprime lenders pull back, one group of lenders has expanded. Credit unions now control more than 20% of the auto financing market, up from 13% in 2002. By staying in play, credit unions have captured more volume.
This has been a dramatic change for dealers who once had their choice of lenders, selecting the one that offered the best return. Not any more.
