Subprime auto loan delinquency surge indirectly helps Car-Mart

The rate of auto repossessions jumped 70% across the U.S. led by subprime and deep subprime borrowers, according to credit agency Experian. It’s a jump expected by officials with Bentonville-based America’s Car-Mart and a trend for which they’ve prepared.

The combined subprime and deep subprime borrowers accounted for more than 12 million of the open auto loans in the second quarter. This accounts for nearly 20% of all open auto loans. Experian notes in their report these risky loans are still smaller than they were at the start of the recession despite hefty increases in the past two years.

Jeff Williams, chief financial officer of America’s Car-Mart, recently told analysts at the C.L. King investor conference in New York, that in the past six years of zero-percent interest more and more lenders have entered the subprime auto space to chase the higher yields. Many of those are new car lenders and their used-car departments, independent auto dealers and traditional tote-the-note lots that write the loans and then sell them off in the secondary market, he said.

Experian considers subprime as borrowers with credit scores of 550 and 619. Deep subprime levels involve credit scores below 550. Williams said Car-Mart’s core customer falls in the deep subprime level. 

That said, Car-Mart’s delinquencies and charge-offs related to repossessions are improving as noted in the company’s recent quarterly earnings report. Car-Mart also holds the loans it makes in-house and works directly with this riskier customer base on collections. The average interest rate charged at Car-Mart is 15%, a rate Williams said it earns given the risks, time and personnel it takes to properly service the loan.

“I think some of these new players in the market offering lower rates are not adequately pricing in the cost to service them after the contract is signed,” Williams said.

One of the ways Car-Mart has invested in tools to help service loans is by equipping each automobile it sells with GPS tracking equipment.

“This is an expense on the front end, but if it helps us track down a borrower when they first become delinquent, we have a better chance to work with them and keep them in the car,” Williams said. “Most of our loans that go delinquent do so in the 11th month of a 28-month contract.”

This compares to the average auto loan that now stretches over 5.5 years with an average payment of $474, according to Experian data.

Car-Mart executives said during their recent earnings call that dealers who stretch out loans for smaller monthly payments aren’t doing the borrowers any favors. Williams said about two quarters ago some of their better customers were courted away by dealers offering lower payments.

“Some of our customers were faced with a decision that looked good at the time. Dealers talked them into turning their cars back into Car-Mart lots and defaulting on our loans. … The one thing we work to do is get our borrowers some equity on the front-end and own the car outright within 28 months, while there is still plenty of life left in the vehicle,” Williams said.

He said the biggest reason for default is mechanical failure, which is why Car-Mart’s 50 buyers scour their regions for the best possible fleet to stock the 136 lots.

Bill Armstrong, analyst with C.L. King, recently upgraded Car-Mart shares from neutral to a buy position.

“We think credit availability for subprime auto buyers may begin tightening up in the months ahead as industry-wide loss rates continue to increase. At the same time, Car-Mart appears to be more effectively adapting to the still-difficult competitive environment, as evidenced by its improved performance in first quarter,” Armstrong said.

He said the dynamics are a positive for Car-Mart as they represent a reduction in competitive pressure and could drive more traffic to their stores. William’s told investors and analysts that market conditions point to Car-Mart having weathered the worst of this hyper-competitive loan climate. He said the company was keeping a “squeaky clean” balance sheet and focusing on cash flows in case there is another wave of competition.

He said Car-Mart’s loan loss provision is still trending higher than historical levels, but much of that uptick is related to competitive pressures with a small amount being macro-economic woes with its 60,000 customer base.

“Some 10% or more of our market consumers are worse off than they were eight years ago when inflation is factored in,” Williams said. “One reason we grow top line revenue consistently is because we take care of a 60,000 customer base. We are there to lend them support and options when they need it. That is how we earn repeat business and referrals.”

Car-Mart shares closed Friday (Sept. 12) at $41.64, down 80 cents. During the past 52 weeks the share price has ranged from a $47.93 high to a $34.56 low.