Used Car Dealers to Ride Wave While Subprime Lending Makes Comeback
February 5, 2013
(Long Island, NY) Everyone knows about the New York Stock Exchange and the millions of public shares traded there every day. While NYSE is clear for most if not all, few realize that the millions of used cars sold also have strong roots to the Big City.
One of the very first used car lots in America was the Empire State Motor Wagon Company, established in 1898 in Catskill, New York. At that time and for years after, few new car dealers even dealt in used cars.
Today, the used car and truck market reports annual sales of almost $370 billion, nearly half of the total U.S. retail auto market. Used cars, in fact, are the largest segment of the American retail economy. The fact that 44 million used cars sold in 2005, more than double the 17 million new cars, underlines the importance of this market.
As vital as it is, the used car market is subject to wide market swings. These swings affect every aspect of the business, from the number of used cars available to sell and the prices that they command. In 2008, the economic crisis crippled the market when financing all but dried up. It especially impacted the subprime buyer, a key used car customer.
Because of the effect of these cycles, the new and used car dealers closely monitor the trends of the marketplace to determine how they will change their business. This is especially the case with new car dealers. Used cars are sold in two fundamental ways. First, virtually all new-vehicle dealers maintain a separate area of their business for used cars. According to NADA, these dealers sold more than 18 million used cars in 2010. Of these, they obtained just over half as trade-ins. They bought nearly 30 percent of those used cars at auction and the remainder from street purchases. An indication of the strength of the used car market is in the fact that the average sales price was $16,500, up by 10 percent over 2009. Many dealers report trading up buyers into new cars because of the equity now found in their used cars.
The new-vehicle dealer both buys from and sells to the used car market. Of those 18 million cars sold, NADA reports that just over 11 million were retailed. That left 7 million used cars, primarily from trade-ins, which were wholesaled. Those wholesaled vehicles end up on the lots of dealers who sell only used cars. This is the second way the public buys used cars. These dealers are themselves divided into numerous market segments. There are dealers who focus primarily in higher-end used cars, and there are those who specialize in the “we-tote-the-note” business. A current trend affecting all used car lots, especially in the Long Island area, is the tight supply of quality used cars available for resale.
Regardless of the market focus, the used-car-only dealers all depend on numerous sources of financing to help move their inventory. Sub-prime lending became an increasingly larger part of the business in the first decade of this century. Due to a number of factors, new cars became less affordable. Likewise, the availability of abundant sub-prime lenders made used cars a viable option for these borrowers.
There are conflicting perspectives on the role of lending in the used car market. For many dealers, being able to get a purchase financed is the deciding factor in whether or not a sale is made. Another advantage to the dealer is that financing plays a critical role in protecting margins. Many prospective buyers are more interested in the monthly payment amount than they are in the actual price paid or cost of financing. This is a source of some concern, with an argument that many working people overpay simply to get financing. Consumer advocates in New York often raise this point. It is similar to some of the arguments made about payday lenders.
The simple fact is, however, that many of these borrowers need transportation to get to work and back. They do their own calculations that a given monthly payment lets them work and keep the difference. A lack of alternative financing often means no transportation and no job. At the same time, lenders make a valid point about one of the fundamental principles of the free market system, a higher risk warrants a higher return.
Today, the general public knows much more about sub-prime lending than they did before the difficulties of 2008. Real estate loans to sub-prime borrowers were given much of the blame for the problems in the economy. The fallout made the concept of sub-prime lending an unpalatable subject to many lenders, including in the sub-prime auto lending segment.
A number or sources, including several mentioned in the Huffington Post, report that attitude is rapidly changing. With the fed rate remaining low, banks and investors have access to cheap credit. At the same time they are looking to get a better return on their capital. This and other factors drive the reassessment of the sub-prime market. They now target those in the sub-prime, credit scores of 550-619, and deep sub-prime, 549 or lower, with rates as high as 17.9 percent making a monthly payment of roughly $225 on a used car cost $10,000 when financed for five years.
The return of sub-prime lending is good news for used car dealers in the New York metropolitan area. As employment slowly increases, there are droves of sub-prime borrowers looking for reliable, affordable transportation. Local dealers stand to ride a wave of opportunity provided that they are ready to make those cars available.