There was an interesting article in today’s edition of Automotive News that explored part of the reason behind Chrysler’s dramatic sales rise over the past few months. While industry-wide sales growth in the US has been around 10 percent, Chrysler is growing far more rapidly around a 30 percent clip. The rub: Chrysler appears to be catering to sub-prime auto buyers more than most other manufacturers.
We have all seen that one of the main causes of the recession of 2008/2009 was the explosion of sub-prime lending for homes, and those armies of unqualified home buyers defaulting on their mortgages. In the wake of that, when lenders panicked about the creditworthiness of their loan customers, they cut off the spigot of sub-prime loans. This, in turn, caused auto-sales to shrivel up as masses of potential buyers were suddenly deemed to be unqualified for loans.
Fast forward to 2012, and sub-prime lending is back, perhaps to levels not seen since the heyday of 2007. According to data reviewed by Edmunds.com (we can’t find the direct link to it), sub-prime lending’s comeback is what is fueling Chrysler’s current streak of 26 months of consecutive sales gains. Their data shows that 29 percent of all Chrysler new-vehicle loans were to customers with FICO scores of 680 or less. (The definition of a ‘subprime borrower’ appears to vary between scores of 640 and 680, but is more precisely an individual who does not qualify for prime-rate lending, whatever their score is.)
The peril of such a strategy is that past credit problems are quite likely a good indicator of future credit problems. To mitigate this risk, sub-prime borrowers often must pay much higher interest rates than prime borrowers have to. Typically sub-prime auto loans’ interest rates exceed 10 percent.
When Edmunds looked at which models have the largest percentage of their loans with interest rates exceeding 10 percent, the list of cars was practically a who’s who of cheap new cars that seem to be more popular with
poor people those of a lower socioeconomic stature (no offense meant to those who own the cars on the list, of course). The stats:
Mitsubishi Galant, 43%
Suzuki SX4, 41%
Dodge Avenger, 39%
Kia Forte, 37%
Dodge Caliber, 36%
Nissan Sentra, 26%
Chrysler 200, 24%
Dodge Journey, 21%
Nissan Versa, 21%
Chevrolet Sonic, 20%
What’s common about these cars? None are aspirational, and most would require a sheepish word of explanation/apology to coworkers or friends when you told them you bought one of them new. “Why the hell did you buy a Dodge Caliber?” “I couldn’t get a loan for anything else, man!”
The industry average pre-recession was that 27% of new-car loans were sub-prime. In the depths of the recession, that fell to 18%, and is now 23%. Chrysler’s data, however, showed that it was 30% pre-recession, 16% during recession, and 29% today.
Funny enough, another auto industry success story is also being fueled in part by sub-prime borrowing: Hyundai-Kia, where 31% of loans currently carry interest rates over 10%. That number is higher than Chrysler’s, of course, so either Kia is selling a zillion Fortes (it’s not) to pull the overall sub-prime number up, or Hyundai is also offering more generous lending terms to its sub-prime borrowers to keep the rest of their cars out of the 10% plus club.
There are a few lessons to be taken from this, kids. First, manage your credit prudently so you don’t have to pay over 10% on your car loan. I thought my August 2008-vintage 6.05% prime loan was bad enough. Second, the fact that a new car is popular with poor people is not exactly a ringing endorsement. Third, if you do want one of these cars, you may find a few on the repo lot in the coming months or years as their buyers struggle with payments. Hey, then more poor people can buy these cars in the pre-owned market!
Being on the above list isn’t necessarily a red flag for buyers the way a list of the most popular rental cars would be, but most of these vehicles (save the Sonic and Versa, and to a lesser degree the Forte) are close to the end of their life cycles, and there may be deals out there for buyers who don’t mind last year’s model – and who have some dirty laundry on their credit reports.