Given the events of years gone by, the very mention of ‘sub-prime lending’ may bring fear to the forefront of your mind. Despite this, investors are turning to the subprime car finance market in their droves, lenders are underwriting deeper than ever before and both are likely making a tidy profit.
Car finance is now more freely available in the US than ever before so it’s hardly surprising that nearly 39 per cent of all finance agreements, totalling $337, were classed as below prime in the final quarter of 2014. Although that’s not necessarily a bad thing, what’s worrying is the fact that repossession rates have risen 70 per cent year-over-year.
Expressing concern, non-profit consumer group, the Centre for Responsible Lending (CRL), has gone as far as to suggest that the industry is in a bubble and we all know what happens to bubbles – they burst.
Chris Kukla, senior Vice President of the CRL said: “Underwriting standards in the sub-prime market have deteriorated, while practices in the market, like interest rate mark up and the sale of add-on products, can make loans unaffordable.”
Despite these concerns, more investors than ever appear to be turning to the market for a means of securing a decent return on their capital. Whether it’s increased confidence in the long-term stability of the sub-prime car finance market or simply seen as an opportunity to make a quick buck is perhaps unclear. In addition, ‘buy here pay here’ car lots have sprouted up across large swathes of America, often displaying large boards with the slogan ‘Poor credit score auto loans’.
The US isn’t alone, though; confidence across the pound also appears to be on a high. Just last week, Sky News reported that US based investment firm Pine Brook Partners were in talks with UK based specialist sub-prime lender, The Car Finance Company, over a possible buy out. News that broke just months after one of the UK’s largest vehicle retailers, The Sunday Times Top Track 250 rated Stoneacre Motor Group, stepped up its sub-prime offering. It became one of the first vehicle retailers to loan its own money to borrowers against the purchase of used vehicles, yet another sign of confidence in the UK market.
In the UK, it’s the Financial Conduct Authority (FCA) who are responsible for regulating the financial services industry. Not only have they tightened their grasp on unethical practices, but they’ve pushed dealers and car finance companies into showing full representative finance examples and flat rates in the interest of transparency. Their eyes are clearly on the industry, but unlike the CRL’s comments in regard to lending and underwriting practices in the US, UK based regulators and consumer organisations have remained remarkably tight-lipped.
Although the concerns in the US are in some cases perfectly justified, the loosening up of underwriting criteria is in part thanks to a technological revolution that’s begging to reshape the car finance industry across the globe. The introduction of the ‘payment box’ has been one such innovation, perhaps most likened to the black box that’s now commonly used by car insurance providers. The small concealable device has a remote ‘kill switch’ that enables the lender to remotely disable and track a vehicle following payment difficulties. In turn, the device helps lenders to mitigate the risk of lending money to an individual who might have previously been labelled as to ‘high risk’ to even consider lending to.
In addition to the advancements in technology, for deep sub-prime finance agreements, lenders often carry out a full income and expenditure assessment prior to approval. This not only helps to safeguard the lender’s capital, but also helps to ensure that those who can’t afford it don’t get lumbered with crippling monthly repayments.
Of course, in some cases the loosening of criteria is nothing more than an attempt to win the most business in what has become a heavily crowded and highly competitive market. A sure-fire sign of this ‘overcrowding’ is the fact that some car dealers now have up to 20 lenders on their panel.
Looking at the bigger picture, the capital at risk in the car finance market both in the US and UK is substantially less that the money that was tied up in the mortgage market when the global financial crash of 2007-08 kicked in. So, even if the bubble were to burst it would be unlikely to destabilize the entire financial system. That said, it would clearly be a catastrophe for companies heavily invested in the industry along with the 10s of thousands of people employed by it.
What are your views on the practices at play in the sub-prime car finance market? Whether you are from the US or UK let us known your thoughts in the comments below.