As the economy crashed in 2008, automobile dealers were caught in a quandary: The few customers willing to buy a car in the middle of the economic meltdown couldn?t get financing.
The situation was so bad that one area luxury car dealer told Michael Allen of the Virginia Automobile Dealers Association that a well-to-do customer with a very high credit score couldn?t find a bank to lend him money to buy a car.
?We?re not seeing those things today,? said Allen , who, like many in the automobile business, sees banks lending customers money again.
?Things aren?t back to the way they were before, but lenders are taking a little more risk,? he said.
As the economy has begun to slowly recover, banks have been approving more car loans for customers with decent credit who two or three years ago could not obtain financing.
The availability of credit is helping customers who want to buy vehicles, experts say, but some in the auto industry think issues are still hampering a recovery to pre-recession sales level.
Despite the concerns, opening the lending spigot is a big deal to dealers who depend on financing to sell cars and to shoppers looking for a vehicle. Buying a car for many is the second-largest big-ticket purchase after buying a house, experts say.
The easing of credit requirements is evident in the improved sales figures, experts say.
Virginia auto sales in 2010 rose 11.41 percent compared with 2009, according to data from the Virginia Automobile Dealers Association . Through May, sales in the state were up 13.3 percent compared with the first five months in 2010.
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Carl Burrell , vice president and general manager of Lexus of Richmond on Midlothian Turnpike in Chesterfield County , said the manufacturer-owned finance companies became more aggressive during the economic downturn as they tried to hold onto potential sales.
While that push helped move some vehicles off crowded lots, the effort was driven by special interest rates benefiting those with high credit scores, steady jobs and low debt ? ?A+ paper,? Burrell said.
Many potential auto buyers didn?t qualify, however, because the recession lowered home values, caused people to lose their jobs and took a bite out of consumers? savings. Those factors knocked many consumers from the top echelons of the credit world.
Dealers had the cars to sell, but the pool of people who actually qualified for loans dwindled, auto industry experts say.
Sometimes you had to fight for the customer whose credit was a notch below stellar, said Burrell , whose Lexus dealership also sells midpriced used cars.
With the economy showing some signs of recovery, banks are approving more auto loans and offering credit to a deeper pool of candidates.
Tom Reedy , senior vice president and chief financial officer at Goochland County-based CarMax Inc. , told analysts during the auto retailer?s fourth-quarter conference call in March that its stores saw an increase in bank approvals .
Credit availability during the chain?s fiscal fourth quarter and its fiscal year, which ended Feb. 28, was greater than in the pervious fiscal year, he said.
More than 80 percent of customers applying for credit received an offer from either CarMax Auto Finance or one of the third-party lenders the retailer uses, he said.
That?s about 5 percentage points higher than CarMax historically sees.
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Auto lending has been a bright spot for the Virginia Credit Union , said Christopher M. Shockley , the credit union?s executive vice president of member services .
Shockley said he expects auto loans originated by the credit union to increase this year by 13 percent from the 2008 level.
One reason for that is the Chesterfield-based credit union?s aggressive push to add members. Virginia Credit Union also is trying to woo customers who might have turned to dealers to find the financing.
For instance, it started a program in August that charges the same interest rate on used vehicles as new ones. Interest rates historically are higher on used vehicles.
In the midst of the downturn, Virginia Credit Union decided not to tighten its lending guidelines, keeping options open for its members.
We really closely looked at adjusting guidelines, he said. ?But we didn?t see a need to do that to our members. One of the things we know is that people need reliable transportation .?
Jeff Hooper , executive vice president and consumer lending manager with SunTrust Bank in Atlanta , said the bank saw an opportunity about a year and a half ago to become more aggressive in auto lending.
That effort included becoming a bigger third-party loan originator at dealerships and focusing on offering loans to customers directly through the banks.
?We?ve seen (the number) of auto loans double in the past year,? Hooper said, though he could not give details.
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George Hoffer , an economics professor specializing in the automobile industry at the University of Richmond , warns that banks making more credit available shouldn?t be interpreted as a full recovery for the auto industry.
?Right now is the worst time to buy a new or a used car,? Hoffer said.
What is happening in the industry, as he sees it, is a perfect storm of issues that includes high used-vehicle prices and low new-vehicle inventories.
The lack of inventory was caused by the Japanese earthquake and tsunami this spring that shuttered factories and cut off parts supplies for manufacturers around the world .
The high used-car prices are driven largely by a thin supply of vehicles sold in 2007 and 2008, which would be trade-ins now, Hoffer said.
Hoffer blames banks tightening their financing requirements for much of the downturn in sales in 2007 and 2008.
?Banks cut dealers off, which worsened new-car sales and caused a drop in used-car values,? he said. ?Now there is a lack of supply of used cars and no new cars to sell.?
J. Theodore ?Ted? Linhart , chairman and CEO of the Dominion Auto Group , says he?s seen some improvements in the credit market, but there is still a long way to go.
?Even though banks are making more loans ? that does not mean that interest rates and advances (the amount lent on vehicles) have gone back to the good old days,? said Linhart , who owns Chevrolet and Buick franchises off West Broad Street near Short Pump Town Center .
He said new banking regulations and lingering concerns by bankers about the economy are keeping financial institutions from lending as much to those with less than stellar credit. And, he said, when banks do take a chance, they are asking for larger down payments or charging higher interest rates.
That, in turn, has him more cautious about how he runs his dealership. For example, Dominion no longer allows the dealer practice of having buyers take cars home before getting final loan approval from the bank .
?I have no appetite for risk,? he said.
Tags: bad credit auto loans
Source: http://autoloan2u.com/bad-credit-auto-loans-auto-sales-regain-traction-as-lenders-loosen-spigot/
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