April 24, 2007

U.S. auto dealerships initiated nearly US$50 billion in subprime loans in 2006, says J.D. Power

Westlake Village – Automotive dealerships initiated nearly US$50 billion in subprime new-vehicle loans in 2006, according to J.D. Power and Associates’ Power Information Network (PIN). About 1.85 million of the 9.6 million customers in 2006 who leased or financed a new vehicle through the dealership, either with a bank, independent finance company, credit union or the automakers’ financing services, were in the subprime category, according to PIN.

Subprime customers have longer loan terms, lower down payments as a percentage of the price, higher loan-to-value ratios and higher retail turn rates than prime credit customers.

Current intense pressure on the automakers and retailers to meet sales and market-share objectives has generated a number of industry-wide trends that seem to encourage subprime business, according to David McKay, senior director of auto finance and insurance at J.D. Power and Associates. Automakers and dealers are tailoring financing terms to meet the financial limitations of their customers: loan terms have been increasing industry-wide, up from an average of 62 months in 2004 to 64 months in 2006, while down payments, as a percentage of transaction price, have declined from 19.3 per cent to 16.3 per cent over the same period.

Subprime business accounts for more than 25.5 per cent of all loans and leases in the compact car segment, the highest penetration of any segment in the industry. Pickup trucks are second at 22.5 per cent, and sporty cars at 19.6 are third. In contrast, the full-size and luxury car segments have the least exposure to subprime, with 7.5 per cent and 11.5 per cent respectively.

Domestic automakers have the most exposure to the subprime market, with 22.2 per cent of their loans or leases in subprime in 2006; Asian automakers’ subprime business was 17.4 per cent of total in 2006, while European companies were 11.3 per cent of total.

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