Are some automakers getting an outsized benefit from increased subprime lending?
This past week, auto-lending hub CarFinance.com released a list of the top 10 new vehicles bought by its below-prime borrowers over the last six months. On that list: Four Chrysler products, three Kia Motors Corporation (KRX:000270) products, two Nissan Motor Co., Ltd. (ADR) (PINK:NSANY), and a Ford Motor Company (NYSE:F) — the Focus compact.
At the top of the list? The Dodge Avenger, pictured above.
CarFinance.com’s data is a limited pool, but I found it interesting, not least because Chrysler and Kia have both made huge sales gains in the U.S. since the financial crisis.
And we know that a lot of Americans saw their credit ratings take big hits during and after the worst of the downturn. An automaker that was quietly making it easier for folks with damaged credit ratings to buy new cars might be seeing outsized gains nowadays
Is that what’s going on?
Not a big deal at Ford, but it might be at Chrysler
It’s probably not what is happening at Ford Motor Company (NYSE:F). Ford Motor Company (NYSE:F)’s in-house financing arm, Ford Motor Company (NYSE:F) Credit, has been quite conservative with its lending policies in recent years – shying away, for instance, from joining the trend toward ever-longer auto loan periods. (Those super-long auto loans are a dumb way to buy a new car, by the way.)
Ford Motor Company (NYSE:F) Credit CFO Michael Seneski told analysts late last year that neither Ford nor Ford Credit was looking to greatly increase its subprime lending. About 5% to 6% of its loans are considered “high risk,” he said at the time, a reasonable number that’s in line with the industry average.
The percentage of subprime loans was a bit higher at General Motors Company (NYSE:GM), which bought subprime lender AmeriCredit back in 2010, but still reasonable.
And that’s OK. Subprime loans have been part of the new-car business for a long time. Carefully managed, they can work out well for everybody — buyers and automakers alike.
But there have been whispers for a while that Chrysler’s big sales gains – up 21% last year — have been fueled by high-volume subprime lending. Last year, credit agency Experian plc (LON:EXPN) said that 29 of every 100 new-car loans for Chrysler vehicles in the first quarter of 2012 went to buyers with credit scores below 680, which it considers subprime.
Think that could come back to haunt Detroit’s No. 3 automaker?
Chrysler owner Fiat SpA (BIT:F) has been talking lately about a Chrysler IPO, which would return the Detroit automaker’s stock to the public exchanges. If Chrysler does decide to go public once again, expect this issue to get a lot of attention.
The article Are Subprime Loans Fueling Auto Sales? originally appeared on Fool.com is written by John Rosevear.
Fool contributor John Rosevear owns shares of Ford and General Motors. Follow him on Twitter at @jrosevear. The Motley Fool recommends Ford and General Motors and owns shares of Ford.
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