Mike Cobb looks at the US market and how the recovery in the world’s largest car market has highlighted the differences between US and European models.
With a car market nearly seven times larger than the whole of Western Europe, the way that the motor finance industry performs in this region is a key barometer to the direction of the industry in the UK and EU.
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As the US market recovers the European market usually follows and the US began its recovery long before Europe, according to Marcie Belles, editor of US car finance magazine Auto Finance News. "It definitely has changed. Three years ago the market was rebounding from the credit crisis. During the credit crisis lenders had pulled back considerably, some had even exited the market altogether. Probably starting round 2011, lenders were getting back into the space."
The subprime space showed this very well. While being a relatively small proportion of all loans, it is an important part of the finance industry in the US, due to its high margins.
"A lot of the subprime lenders now are in expansion mode. During the credit crisis they really contracted a lot, credit was very hard to come by. Now they are growing originations,
"With the profit margins we are seeing in the prime space, a lot of lenders looking to move down the credit spectrum for growth," continues Belles.
She adds that for smaller lenders there are other incentives to join the subprime market in the US: "Another thing to think about with subprime is that for the non bank subprime lenders the regulatory landscape is less of a looming force,
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By GlobalData"Right now in the US, large bank lenders are governed by the consumer financial protection bureau (CFPB) but smaller lenders are excluded from that oversight. So, for the most part, the subprime lenders don’t fall under the CFPB’s purview."
For larger finance houses the compliance is, however, the top of their priority list at present, Belles believes.
There are therefore clear similarities between the US market and the European markets in the subprime markets but there are some startling differences in other areas.
Captives markets open to many
One major example is the role of captive finance companies. These are nowhere near as exclusive as in the European model.
Due to the bankruptcies that rocked the motor manufacturing industry post credit crisis the captive finance companies at car makers GM and Chrysler were sold off, with independent finance company Ally Financial becoming the effective captive portfolio holder and lender for the two group’s products.
This was a situation that remained until 2010 when GM bought the subprime lender AmeriCredit to create GM Financial and Chrysler joined with Spanish finance company Santander to create Chrysler Capital.
As a result, for two of the big four manufacturers in the US captive finance is a nascent and still relatively small proportion of the lending on new cars.
According to Susan Sheffield, treasurer of GM Financial, the penetration rate for her company remains at about 30% with Ally Financial holding approximately the same proportion of new GM business. According to Experian, this means GM Financial are not even in the top 20 lenders on new vehicles.
For Toyota and Ford the situation is somewhat different. Toyota’s successful period during the downturn and better credit rating has allowed it to provide cheaper finance for all customers from the super prime down to the near and even subprime sectors. Ford’s turbulent period during the crisis, when it managed to avoid bankruptcy and crucially retain its finance arm, has meant that its credit rating has become higher than its Japanese rival. For this reason, Toyota was able to outstrip the Dearborn giant in sales in 2013.
Despite this finance led sales success, captive financiers only accounted for just over 50% of new car loans, according to credit rating agency Experian’s quarterly report. Indeed, the top three finance providers in the loan markets were all independents, with Wells Fargo taking 6.22% of the market share.
Loans not lease
Perhaps the biggest difference between the European and US markets comes from the type of credit extended to consumers.
The UK new car market recovery has been led by a lease product, PCP, and in Germany and France the use of leasing is still one of the primary products used by consumers.
In the US the finance markets are dominated by loans with 86.21% of all finance extended in Q1 2014 being a loan. Lease, which includes hire purchase and the equivalent of PCP style products, was just 13.79% in the same period.
The situation for leasing products was far worse before though describes Sheffield: "In 2010 there was very little leasing being done unless you were Toyota or Honda or very highly rated companies that had access to unsecured debt."
Indeed, when GM Financial began as the new captive for GM, they didn’t even have a lease product on board. One of the reasons according to Sheffield was "kind of a function of their mix of vehicles. They sell a lot of trucks and those don’t typically get leased in the US. Whereas if you look at a Mercedes or a BMW they are going to have a high lease, higher than the average."
This changed in 2014 when the company launched its leasing programme aimed at prime rated customers.
The use of leasing products is, however, growing not just at GM but across the whole of the US market; the current market share across all sales represents a 1.19 percentage point increase on the same period in 2013. For new products the rise was more dramatic with market share climbing over 2.5% year-on-year.
The rise of the consumer
Part of this rise has also been down to the interest rate levels across the US. "Cars are more expensive today than they have been from an average ticket price so low interest rates help the affordability," says Sheffield "80 plus percent are borrowing money to lease or loan, because its a big ticket item so having affordable financing is important."
The main reason for the strong return of the US car finance industry has been that across the US consumer confidence has returned, both Belles and Sheffield believe.
Long term rental
Another aspect of the US financing market that is markedly different from Europe’s surrounds the term length of the loans that are available. While not common it is not unknown for customers to request terms of 86 months in duration, to drive down monthly costs.
This presents problems to consumers that perhaps they hadn’t considered, believes Belles. "People keep their cars for three years, and when they turn them in to get a new one, if they had a seven year loan, then they have so much negative equity built up, that they then have to pay that back on top of the new loan. So the longer the terms extend, the greater the negative equity, and the more difficult it is to come out from under the loan."
A rise in term length, which seems to be happening, is a warning sign for other problems, according to Sheffield. Ordinarily such activity led to a higher rate of delinquency, particularly in the subprime markets.
This time, however, the delinquency rates have actually fallen in the first quarter of 2014 year-on-year. (see table below)
More worrying for the finance market has been the number of repossessions that have been carried out in the first quarter of the year.
While the overall figure remains a small percentage of all loans originated, at just 0.68%, the number of repossessions conducted has jumped 36.5% over the year before.
Such figures, however, give little cause for alarm, agree both Belles and Sheffield. Historically sensible lending based on risk profiling, plus the fact that for the US consumer a car represents a lifeline for employment, has kept the motor finance industry in fair health.
A rise in the number of repossessions could be taken as no more than a signal of a growing finance market. As long as the growth doesn’t turn into a bubble that eventually bursts the US can breather more easily. And with them the Europeans.
