Auto Lending Competition Heats Up

CU360
May 27, 2010 | COMMENTS

Car dealers, auto-finance companies and credit-market analysts are seeing a spring thaw in the auto-finance market—especially for drivers with good credit. This means intense competition for credit unions as they try to compete for auto loans.

Today, "if you have a job, and there's equity in the loan…that's it," says Ed Gorham, director of the finance department at Planet Honda, one of the biggest Honda dealers on the East Coast. In many cases, customers don't need down payments, Gorham tells The Wall Street Journal . People with FICO credit scores as low as 400 are getting loans.

Recent promotions include:

• GMAC Financial Services is offering 0% auto loans and discounted leases to help GM and Chrysler boost sluggish sales.
• Honda Motor Co. is offering aggressive lease deals, including a no-money-down, 36-month lease on a 2010 Honda Civic LX with payments of $159 a month.
• Luxury car makers are pushing to accelerate the rebound in demand, with BMW dealers offering $2,500 discounts on certain models.

The thaw is widespread, according to data compiled by Informa Research Services and J.D. Power and Associates. For example, Informa's analysis of the rates lenders are offering to consumers in different credit tiers shows that between January 2009 and March 2010, the average rate offered to consumers with top credit—FICO scores in the range of 720 to 850—dropped to about 5.8% from 7.1%.

Customers with middle-tier FICO scores in a range of 660-689 were being offered loans at an average rate of about 9.4% in early March, down from an average of 10.2% in January 2009.

But people whose credit scores fell below the 660 level were offered loans earlier in March at average interest rates of about 13.2%—up from about 12.9% in January 2009.

That's a different story from the late-2008 financial-market meltdown, when customers with credit issues had trouble getting new-car loans. Customers needed to put down one-third of the car's price or get co-signers if their credit scores weren't top notch, Planet Honda's Gorham says. Now, even the consumer with a weaker credit score might get the loan, as opposed to being denied.

Jump starting demand

The recovery in the auto-credit market is the result of various factors, analysts say. A program launched by the Federal Reserve to jumpstart demand for securities backed by car loans worked, and slowly allowed auto makers' finance companies to once again raise capital for new loans by selling off their old ones. That program recently expired, amid a consensus that it was no longer needed.

J.D. Power and Associates analyzed its credit data, along with data from TransUnion and Fair Isaac, and found that the share of subprime auto loans financed by auto finance companies expanded to 51% in early March from 40% in January 2009.

Informa puts the difference between the average loan rate offered to someone with a FICO score in the 620-659 band and someone in the 660-689 band at nearly 4 percentage points. That's about $2,300 over the life of a four-year, $25,000 car loan.

Now more than ever, consumers shopping for auto leases and loans need to know what their credit scores are—and if they can, take steps to repair or bolster their credit if the numbers are low. Consumers also have more options when shopping for the best rates from their credit unions, as well as banks, dealer finance departments, and the auto makers' lenders.

"Definitely the squeeze has eased up,'' says Andy Koblenz, vice president and general counsel for the National Automobile Dealers Association. "It hasn't gotten back to where it was two years ago, but it's really improved."

This article was orginally published online by CU360, an online portal for benchmarking tools, market insights, industry data, and analytical information at cu360.cuna.org. Reprinted with permission.