Though a surprising number of buyers pay cash for new cars, most Americans have to—or choose to—finance their purchase. So do buyers of used vehicles. Because many of those folks are buying used because they can't afford a new model, their financial limitations are more stringent.
Without available financing, non-affluent folks might not be able to get into a vehicle at all. As long as lenders remain hesitant, used-car shoppers with low credit scores face a tall hurdle.
"Finance companies are looking for far more equity," said dealer Tammy Darvish, speaking at the National Remarketing Conference in November. As economic troubles continue, "more people ... fall into the nonprime/subprime market," added Neal Boardman of BB&T.
Used vehicles account for 61 percent of all financing, said John Sigman, national director of business development at Experian, and they have different credit needs. Just over half of used-car shoppers fall into one of the prime credit-score categories; the others are nonprime or lower. The average credit score of used-car buyers is 684, versus 769 for new cars.
Low scores make it far more likely that applicants must turn to a finance company or a Buy Here-Pay Here (BHPH) dealership, both of which charge far higher interest rates. Finance-company rates average more than 16 percent, Sigman said—more than twice the average for banks or credit unions. Finance companies and BHPH dealers typically finance smaller amounts, so the low-score buyer will be directed to less-expensive vehicles—actually, a sensible choice.
The "shift is going more to Super Prime and Prime," said Robert Granados, vice-president and general manager of DealerTrack, during a webinar. Rates for customers who fall into Deep Prime categories are substantially higher, having risen from 15.6 to a hefty 18.12 percent in the past year
When making judgments, lenders consider a person's payments-to-income (PTI) ratio. High PTI indicates that the customer might have trouble handling the monthly payment, because he's already overburdened by debt. "If they're looking at too much car, they're really looking at stretching too much PTI," Granados said.
"There is a vast need for basic transportation," said Larry Dorfman of the CarMark certification program, at the Remarketing Conference. "In hard times," explained dealer Jack Fitzgerald, "there are a lot more 'need' buyers." Until lenders loosen their purse strings and credit-challenged customers learn to lower their expectations, some of those "needs" won't be met.