Credit Is Tight for Some "Prime" Auto Loans, Too

Of course the most credit-challenged customers are having the hardest time getting auto loans. But at least some customers who have every reason to assume they are "prime" customers, in the lowest-risk category, are also getting turned down for auto loans that would have been approved before the present credit crisis.

After they're turned down, some of those good risks re-apply and get approved, but most elect to keep the vehicle they have, according to CNW Marketing Research, Bandon, Ore.

That's the upshot of a recent set of questions and answers with Art Spinella, president of CNW, following up on an earlier item here this week (see which) that said more credit applications are getting turned down for auto loans.

I made a point of following up with Spinella because in conference calls with the auto companies on Oct. 1, announcing September U.S. auto sales, several reporters cited CNW's report on credit applications, which came out the same day. However, there seemed to be some doubt that some "prime" customers were getting turned down, too.

Maybe understandably, considering what's at stake, the car companies maintained that creditworthy customers shouldn't have much trouble getting financed. And that's true for the most part. But it's also true, according to CNW, that at least some seemingly well-qualified buyers are getting rejected, too.

The following is an edited version of my exchange of e-mails with Spinella:

BNET: What exactly does it mean to say (as CNW did) that 80 percent of "prime" customers are getting approved this year, versus 90 percent a year ago?

Spinella: Based on our internal FICO ratings (Fair Isaac Corp. is a major consumer credit-rating agency), 90 percent of those who were "prime" a year ago got approved versus only 80 percent this year.

BNET: But the application doesn't get submitted as a "prime" application -- does it?

Spinella: No, but most lenders pre-rate applications. For example, a dealer will ask for permission to check a customer's credit report. He will submit basically a pre-check whether certain lenders consider it "prime" or "near prime" or "sub-prime" and select all the lenders that are accepting that type of application. A sub-prime customer is rarely submitted to GMAC, for example. At the other end of the application, the definition of "prime" changes. Most financial institutions have raised the "prime" definition by roughly 20 points (FICO) compared to what it was two years ago. (BNET note: FICO scores range from 350 to 850. Higher is better.)

BNET: I would have thought it's the same form for everybody, and if the person has a great credit score and a terrific job, etc. they get a lower interest rate associated with a low-risk "prime" customer, and if their credit score sucks and they have a lousy job, they get a higher rate associated with higher risk.

Spinella: That normally is the case. But not all financial institutions will accept all applications (especially lower near-prime and sub-prime), even at a higher rate.

BNET: Is this another way of saying that many people who would have been classified "prime" last year aren't considered prime any more, because standards are higher?

Spinella: Correct.

BNET: If the F&I manager (dealership Finance and Insurance manager) sent the customer to a "prime" lender and they got turned down, pretty soon they'll (the F&I manager will) have a better feel for where the new cut-offs are, right?

Spinella: We can only hope. But again, the number of prime lenders an application is being submitted to, has increased -- What BofA (Bank of America) might have approved last month may be rejected this month, even though the FICO score or internal scoring hasn't changed. Under current circumstances, the issue (for the lender) is, "How much of the portfolio should be auto loans?" The answer: Most financial institutions are cutting back on auto loans, home improvement loans, etc. simply because the capital markets have become stingier.

BNET: Approval rates could start going up again, but it might be at least in part a measure of F&I manager expertise, no?

Spinella: Correct.

BNET: Also, is there any way of knowing "what happens next?" to those people who get turned down?

Spinella: We've followed up on many of the rejected customers. Here's what they are doing: 85 percent are not attempting to buy another vehicle electing, instead, to keep what they have. Of those who need a car or truck because the current one is on the ropes, they are selling other assets, from boats, to motorcycles, to holding garage sales, plus using available savings and credit cards that aren't maxed out. In California and Florida (as well as few other states) where home equity loans are similarly impacted, both of the above are also true.

BNET: If a "prime" application gets turned down, that doesn't necessarily mean that person can't acquire a car, it might just mean they're going to have to pay more than they expected, in the form of a higher down payment, higher interest rate, longer term -- right?

Spinella: Correct in part. The rejections (in CNW's analysis) include those who were willing to increase the downpayment and willing to pay a higher rate. Some are accepted (shown in the percentages), others aren't.