Buy here, pay here car dealers don’t foresee impact related to possible Fed rate hikes

The Fed might raise interest rates up to three times this year, but barring any dramatic increases, two of the largest buy here, pay here dealers in Arkansas don’t expect rises to impact auto loan interest rates.

In December, the Federal Open Market Committee raised interest rates for the second time in about 10 years — to a range of 0.5% to 0.75%. At the time, up to three more interest rate increase were expected in 2017, but on Feb. 1, the Federal Reserve held rates steady. Seven more Fed policy meetings remain in 2017, and the next one is set for March 14-15.

“As long as increases are moderate we would not expect to change our rate,” said Jeffrey Williams, president and chief financial officer for Bentonville-based America’s Car-Mart. “If rate increases are dramatic, we would have to consider.”

In May 2016, the buy here, pay here car dealer raised its interest rate to 16.5%, from 15%, and through this year, the rate is expected to remain at 16.5% “barring any dramatic increases.” At the end of fiscal 2016, Car-Mart was facing shrinking profit margins that had fallen to 38.7%, and Williams said increasing profit margins to more than 40% would be a priority. Now, “we are slightly over the 40% due to solid expense management.”

When asked whether Car-Mart offers an incentive rate for repeat customers who successfully pay off their car loan, Williams said “our rate is 16.5% across the board. The market rate for deep subprime is around 20%. We intentionally set it under market to reward our customers, and we do not differentiate on the rate. Everyone gets the same rate.”

According to Experian Automotive, the average rate on a used car loan was 20.02% for customers with a deep-subprime credit score, which is a credit score of between 500 and 300. Nearly all of Car-Mart’s customers have a credit score of less than 550, which the dealership considers as deep subprime, Williams said.

The majority of customers’ credit scores at the Best Buy Here Pay Here in Springdale are “at the 500 mark,” general manager Daniel Nouguier said. The dealership also offers its customers a flat rate but at 12%. Like Car-Mart, he doesn’t expect the proposed rate hikes to impact Best’s interest rate and pointed to when he worked for Best as a salesman “a decade ago,” and the interest rate was the same as it is now.

“It’s very fair,” Nouguier said, adding that he understands the risks are elevated for customers with subprime credit, but he doesn’t see a “need for companies to really stick it to people.” The dealership offers three-year loan agreements, and most customers can be approved as long as they’ve had a job for six months and have lived in the area for a year. Nouguier has worked with “people coming out of bankruptcy or a foreclosure. Everybody has a need for a vehicle.”

On Feb. 20, Car-Mart is set to announce third-quarter earnings for fiscal 2017 after the markets close. Shares of Car-Mart (NASDAQ: CRMT) closed at $40.35, down 5 cents, on Wednesday (Feb. 14). In the past 52 weeks, the stock has traded between $47.75 and $19.49.

FINANCING MARKET SHARE
The market share of total financing has been flat in the buy here, pay here sector of the automotive industry, according to the most recent Experian report on the industry. The sector has a 6.2% market share of total financing, compared to banks, which have a 35.1% market share, followed by captive financing with a 28.3% share, credit unions (19.6%) and finance companies (10.7%). Captive financing is financing provided by the manufacturer, such as Ford Motor Co. or General Motors. Credit unions have seen the largest increase in market share, rising to 19.6% in the third quarter of 2016, from 17.6% in the same period in 2015.

The market share of used car financing in the buy here, pay here sector fell to 11.5% in the third quarter of 2016, from 12% in the same period in 2015. Meanwhile, the share rose for banks (38.1%), captive (8%) and credit unions (26.4%) but declined for finance companies (16%).

According to National Alliance of Buy Here Pay Here Dealers, citing the Experian data, “finance contracts with deep-subprime consumers dropped 2.8% to the lowest level on record since 2011. Looking specifically at used vehicle financing, analysts noted that the subprime auto finance sectors saw an even larger decrease. Financing for consumers with deep-subprime credit dropped by 5.3% to 5.11%, the lowest Experian has seen on record since 2007.”

Customers with deep-subprime credit who previously purchased buy here, pay here vehicles from independent dealers, later bought them “from franchise dealers, independent finance companies and credit unions,” according to the alliance.

“The recent market change now allows independent operators to regain that lost market share,” the report noted.

In the third quarter of 2016, lenders reduced the number of loans to customers with subprime and deep-subprime credit and gave more loans to those with better credit. “Better days are ahead for independent buy here, pay here operators who can capitalize on the opportunities.”