Consumer Perception of Loan Rejection Leads Industry to Lose $10 Billion in 1Q Auto Sales
BANDON, Ore. — The average FICO score for a new-vehicle buyer hit its lowest level since May 2006, according to the latest CNW Research data.
This figure came in at 722 in March and includes buyers who financed, leased and paid cash. However, the figure did exclude commercial fleets.
Despite the decline, the figure remains "a long way from the lowest level recorded in November '05 when the average FICO was 681," noted Art Spinella, of CNW.
In another analysis, CNW discovered that one of the reasons auto sales have plummeted so much is because many consumers think they can't get approved for an auto loan.
"Consumers who are convinced they can't get an auto loan even though their credit history and FICO score would qualify under even stricter application parameters have cost the auto industry more than 800,000 sales in the first quarter (of this year)," Spinella pointed out.
Adjusted for the historic level of probable approvals that never applied, he indicated that the figure is close to 400,000 lost sales.
"Who's to blame? Lenders, media reports, politicians and public chatter about perceived difficulties of getting a loan," Spinella explained.
"With the average transaction price for a new vehicle of $27,500, the industry lost more than $10 billion in vehicle sales, even using the lower 400,000 figure," he stressed.
He went on to note that this excludes the sales lost thanks to home equity lines of credit that were rescinded, even when homes had sufficient equity to justify the continuation of a credit line.
"On the issue of home equity, about 11.5 percent of all car sales in cy '07, roughly 1.9 million units, were purchased using a home equity loan or line of credit. That shrunk to 5 percent in '08," Spinella reported.
"Of active shoppers who dropped out because they believed they didn't have enough home equity to make the vehicle acquisition, half actually had more than enough and would have added roughly 600,000 unit sales to the '08 total," he added.
Explaining the situation a bit more, Spinella said that there are always new-car intenders who don't think they can get approved; however, the lack of "proactive loan offers in the past year caused a goodly number to simply not ask."
He noted that when he refers to intenders, these are consumers who are actively looking to make a purchase, not just causal prospects.
"And while many dealers have been aggressively promoting the availability of loans at the local level, their voices needed to be supported by financial institutions that historically have promoted such loans through credit-card bill stuffers, direct mail and in-bank reader boards," Spinella highlighted.
"Since last summer, the number of such auto-loan promotions have dwindled to virtually nothing, CNW surveys show," he continued.
Also, when combining the number of intenders who decided they did not have good enough credit or not enough home equity to pursue vehicle purchases, this cost the market at least 1 million vehicles that would have been added to last year's 16.2 million sales figure, Spinella reported.
Looking at the first quarter of this year, he said that "tight-fisted" banks and other lending institutions rejected auto loan applications that cost the industry 200,000 sales had they used 2006 credit criteria for approval.
And these rejections would have cost the industry 7000,000 sales had companies loosened the 2006 criteria by 3 percent.
"Translated, if the average FICO score of new-car buyers who finance was 680 in cy '06, lowering that to 660 would have generated 564,000 additional sales in '06; 1.5 million in '08; and 729,000 in the first quarter of this year," Spinella explained.
"Even assuming 2006 as the base for auto loan approval, the increase in rejections due to tougher credit criteria resulted in lost sales of 282,000 in cy '07; 917,000 in cy '08; and 626,000 in the first quarter of '09," he said.
Spinella noted that this analysis is just related to rejection rates and does not include other lost sales caused by lack of leasing, intenders who could have gotten an auto loan had they requested one and other issues.
Adding some context, Spinella said, "Auto loans did not cause banks to falter. The default rate including both voluntary and involuntary repossessions has been less than 3 percent, a nominal and historically acceptable percentage, according to banks and other lenders.
"While home equity loans are a major part of a new-car purchases in certain states, notably California, it is not reflective of the country," he pointed out. "In all, about 5 percent of all new-car purchases in '08 were made with a home equity or line of credit, hardly the 30-plus percent sales decline."
Moving on, Spinella said that despite the tight credit and consumer perception concerns, it isn't all bad news facing the industry.
"Not all new-car loan application rejections are bad news for the auto segment of the economy," he indicated more specifically. "Many of those who are rejected turn to the used-car side."
In fact, in CNW's Purchase Path Surveys, historically about 50 to 60 percent of new-car intenders turned down for an auto loan elect to purchase a used vehicle.
"The vast majority were approved for a used-car loan," Spinella stated. "That changed in 2008, however. Only 38 percent of those who were rejected for a new-car loan were able to get approval on a used vehicle. Tighter credit criteria and the lack of lending appear to be the primary reason for such rejections.
"The high rejection rate on new cars, however, resulted in more than 940,000 used-car sales even though the overall percentage was significantly lower than historic," he added.
Although many of those that were turned down for new-vehicle loans turned to used, many consumers who can only afford used were also impacted by tightened credit.
According to CNW, these rejections led to the loss of more than 4.37 million used-vehicle sales in 2008, which is three times the units lost in 2006 and four times the amount of those lost in 2007.
"Granted, not all of those who applied for a used-car loan would have qualified, but the massive rejection percentage in 2008, 11.34 percent, far eclipses every year since 2000 and is five times higher than in 2007," Spinella shared.
Lending institutions have witnessed a climb in delinquencies and repossessions on used-car financing over the last few years, which Spinella said makes their caution somewhat understandable.
However, he pointed out, "But 2008's increase was clearly not auto-industry related and hopefully with bank profits rising, a return to reasonable rejection levels will follow."