Subprime Car Loans Are Back

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By Rodney Johnson


General Motors (NYSE: GM) has a plan, and it doesn’t involve electric vehicles.

Sure, the green-mobiles get all the headlines, but they don’t produce a lot of dough. For that, you need to sell a bunch of cars, and for that, you need clients that can get financing.

Enter the new GM credit unit.

In 2010, GM spent $3.5 billion to purchase AmeriCredit, a subprime lending specialist. The unit is now called GM Financial.

But this isn’t the car company’s first go-round with financing.

For those of us with a memory that can reach back before the financial crisis, we remember the monster that ate the company, General Motors Acceptance Corp., or GMAC.

To sell more cars in the 2000s, GMAC consistently reached further down the credit well, financing clients with spottier credit records.

The company moved units, but the loans didn’t stick when the economy rolled over. By that time, GMAC had ventured into other areas, like financing sub-prime mortgages, which also went south.

During the “bankruptcy-but-not-a-bankruptcy,” when the unions got the assets and the bondholders, equity investors, and taxpayers got the shaft, General Motors had to punt GMAC.

To qualify for a big, fat bailout, the financing entity had to become a bank. That’s how Ally Bank started.

I’ve always found it ironic that a bank borne out of such financial shenanigans and bad faith dealings would use advertising that emphasizes trust and doing the right thing, but what do I know?

Back to GM Financial.

Since acquiring AmeriCredit, GM has beefed up the financing arm. The efforts went into overdrive after 2016 when several sub-prime auto lenders hit the skids.

Companies like Summit Financial, Spring Tree Lending, and Pelican Auto Financing, which all specialized in lending to people with a credit score of 620 or less, have gone out of business.

This leaves the auto industry struggling to finance those marginal buyers so the car makers can keep units moving off their lots.

The slowdown in sub-prime lending is a part of the reason auto sales slowed after 2016.

But all of that is history!

GM is counting on GM Financial to bolster sales by offering more lending to poor credit borrowers, enabling them to drive the vehicle of their dreams off the lot, typically with a very high interest rate loan.

The transaction leaves GM smiling from ear to ear, as it makes money on the car and the loan.

The best part of all? Such lending is particularly helpful in a weak economy when traditional lenders tighten their lending standards to avoid losses.

When the economy inevitably rolls over, GM will be perfectly positioned to keep those loans and cars rolling.

Of course, there’s that little issue of repayment.

Today, with unemployment at 3.8% and average hourly earnings up 2.7% for the year, 5.8% of sub-prime loans are at least 60 days overdue. That’s a higher rate than during the financial crisis, when 60-plus days delinquency reached 5.1%.

Maybe there’s a good reason why sub-prime auto lenders are shutting their doors. And perhaps regular banks aren’t crazy when they tighten lending standards in weak economic times.

But hey, that’s not GM’s problem.

The car company has developed an excellent plan to keep things going. And if it needs to issue bonds backed by questionable car loans and then slice them up as derivatives to keep the money rolling in, what’s the worst that could happen?

GM might make cars worth considering again (my wife drives a great 2015 Chevrolet Colorado 4×4), but I’ll keep my distance from its stock.


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