Auto sales improve as credit terms ease

Auto dealers across the local region and country are benefiting from a perfect storm scenario that began brewing in recent months thanks to active consumer demand, eased credit terms and improvements in the job market.

Vehicles on U.S. roads are roughly 11 years old on average which indicates Americans will likely continue to replace them in the near term with more fuel efficient and tech savvy models, according to Edmunds.com.

Automakers recently reported strong February sales, with car and light truck deliveries rising from a year ago at 9.3% for Ford, 7.2% higher at General Motors and 4.1% more at Chrysler.

Jimmy Young, general manager of Everett Chevrolet in Springdale, said February was a record month for his dealership with new car sales up 31% over the previous year.

“We sold 200 new and used vehicles last month, a record for us. More people who had waited and waited and waited finally got the confidence they needed to buy,” Young said.

The best seller on his lot is the Silverado pick-up, but he said other popular GM models include the economy Cruise and the Equinox SUV.

Smith Auto Group at the state line in Jane, Mo., reported the best month the ownership has seen since acquiring the dealerships in the summer of 2012, according to general sales manager, Michael Grieving. He said prices are holding constant on many domestic entry-level models catching the eye of more consumers who have driven their cars several years past their prime.

“I get two kinds of trade-in’s – those from frequent buyers who trade every year and those worn out because consumers have held on to them well past the last payment," Grieving said.

Local dealers say they are bullish for 2013, and are holding an arsenal of quality brands and the most flexible financing terms they have seen in several years.

Economists also attribute the better sales in part to more availability of financing for consumers with less than stellar credit as well as historically low interest rates.

Dan Picciotto, director of corporate ratings with Standard & Poors, said in an interview that 2013 auto sales expectations are brighter given a recovering macro economy, pent-up consumer demand and slowly improving consumer confidence.

“We expect automakers to sell 15.5 million new vehicles this year, a healthy increase fueled in part by ample financing options by third party lenders,” Picciotto said.

CREDIT AVAILABILITY
Multiple sources report more loans being extended to non-prime, subprime and even deep subprime borrowers in recent months – a trend that is making new car purchases more readily possible for this consumer demographic. Young, with Everett in Springdale, said General Motor’s financing arm Ally Bank has been fairly aggressive offering reduced interest rates to those with blemished credit.

“In the past, some of these folks might have been looking at 17% interest, but Ally has made loans available at 7.9%, 8.9% and 9.9% which can make a huge difference in one’s ability to afford a new car over a used car,” Young said.

Grieving added that third party lenders who were allowing for an 80% loan-to-value ratio have now eased that to 100% in some cases. He said with more consumers waiting longer to buy, there is not the negative equity factor that once plagued buyers during the peak years making it easier for them to get an affordable deal done.

Piciotto said that asset backed auto credit portfolios have performed well historically and there may be more interest in these investments as lenders and investors chase higher yields in very low interest rate climate.

“I don’t think we will ever see credit as lax as it was prior to the recession,” Picciotto said. “But dealers do offer ample financing options today.”

Used-car sales magnate America’s Car-Mart recently cited stiffer competition from more third party lenders extending credit to subprime and some deep subprime borrowers.

“We have worked to extend our loan term and reduce our down payment requirement for a few customers with better credit to keep from losing them to stiffer competition,” chief financial officer Jeff Williams, said in an interview.

He said the majority of Car-Mart’s 57,000 customers fall in the deep subprime credit category and even with the recent credit easing many would still have difficulty buying a new car. The average car sold by Car-Mart is 9 years old, with 100,000 miles, and costing roughly $9,500. The average monthly payment is $352 per month with a 29-month term, according to Williams.

“We strive to add value for our customers by serving them from the day they purchase until the final payment is made. We offer a payment protection plan that is a debt waiver to forgive any unpaid balance should the vehicle be stolen or wrecked,” he said.

Fitch Ratings recently noted signs of more relaxed auto credit terms in the Federal Reserve's January Senior Loan Officer Opinion Survey. The Fed reported that 13% of surveyed lenders eased credit terms for individual auto borrowers during the fourth quarter of 2012. This compares with a 23% figure in the third quarter of 2012, when a similar easing of standards was apparent.

Fitch expects the recent pattern of easing underwriting standards to continue in 2013, but also warns some further weakening in lender credit metrics will likely result.

“Continued robust demand for new and used vehicles and increased willingness to lend due to easy funding access, combined with expected moderation in used car values likely points to some deterioration in lender asset quality through 2013. Still, we expect the modest weakening in lender credit metrics to be manageable and consistent with current ratings,” according to a statement from Fitch.

CREDIT RECAP
A recent report by Experian Auto Resource notes a slight deterioration in credit score among consumers buying new and used cars toward the end of 2012. Prior to the recession of 2008, credit scores among new car buyers averaged 749, peaking at 775 in the fall of 2009, but scores decreased to 755 at the end of 2012.

A similar pattern was seen among used-car buyers in the same period with average credit scores ranging from 663 pre-recession to peak at 684 in 2009, but falling back to 668 by late 2012.

During the last quarter of 2012, non-prime auto loans accounted for 13.06% of the total new car marketshare. This was up from 12.22% a year before, according to the Experian report.

Subprime borrowers made up 9.91% of the new car buyer pool during the last quarter of 2012, up from 7.79% a year before. Deep subprime borrowers also increased in the year-over-year period to 2.60% by the end of 2012, versus 1.87% in the prior year.

In the used-car sector, Experian reports more modest increases in the all three of the loan categories ranked below prime.

Roughly 18.7% of used car sales were financed to people with deep subprime credit rating during the last quarter of 2012. This is up slightly from 17.18% a year before.

Subprime credit borrowers accounted for roughly 18.99% of the used car loans made in the quarter, up from 18.3% a year ago.

Loans made to non-prime credit customers totaled about 16.74% of the total loan made, up slightly from 16.39% a year ago.