What is a Credit Score?

A credit or FICO score suggests the ability and willingness of an applicant to be able to repay debt. This score is compared and evaluated against other consumer credit reports, and is,in essense, a "barometer" to measure hte likelihood that the debt will be repaid in a timely manner. Higher scores indicate a a better chance that the applicant will repay the debt as agreed, with no collection efforts required by the lenders. In effect, a higher score can mean the debt is "self-servicing", with payments coming in on time.

A lower score may indicate the need for some collection efforts on the part of the lender. Payments may come in late, or serious collection efforts may be reuired by the lender to collect deliquent payments. A substantially lower score may indicate the debt may become uncollectable for a lender, and as such, the lender ,ay decline an application with a significantly low score.

Results in scores ranging from 350 (highest risk) to 800+ (lowest risk). Higher scores may mean a lower chance of default or late payments and may generate better terms.

So what exactly goes into calculating a credit score?

PAYMENT HISTORY (35%) - Account payment information and payment patterns
AMOUNTS OWED (30%) - Number of accounts with balances, the amounts owed on specific types of accounts and the proportion of credit lines used.
LENGTH OF CREDIT HISTORY (15%) - Time the accounts have been open.
NEW CREDIT (10%) - This includeds the number of recently opened accounts & inquiries, the time since recent account openings and the re-establishment of positive credit history.
CREDIT MIX (10%) The number of various types of accounts.

Lenders Shun Subprime Market

As credit standards tighten, customers switch to cheaper models, used cars

Donna Harris, Automotive News – February 20, 2008

SAN FRANCISCO - As the credit crunch deepens, many independent lenders are cutting back on loans to customers with tarnished credit histories. In January, more than 4 percent of subprime auto loans were at least 60 days delinquent, according to Fitch Ratings. That rate was up 43 percent from January 2007 and the highest in 10 years.

Some small regional banks have stopped making loans through auto dealerships altogether.

The credit crunch is forcing many would-be consumers to buy cheaper models, or purchase a used vehicle instead. If customers with shaky credit can get loans at all, often they must make a bigger down payment, pay higher interest rates and accept loans of shorter duration.

For dealers, tighter credit policies sometimes force them to shoulder more liability when loans go sour. And in some cases, independent lenders are ending long-term relationships with dealers.

That will create a significant drag on vehicle sales. According to industry estimates, consumers with subprime credit ratings buy nearly 30 percent of all new vehicles. The bottom line: Dealers are more dependent than ever on automakers' captive lenders. The captives appear more willing than independent lenders to make subprime loans in what is shaping up as the worst year in a decade for new-vehicle sales.

Many lenders say that because their cost of money has increased, it is more expensive for them to offer subprime loans.

"For folks in the subprime and near-prime end of the market, it is a much tougher place," said Brent Burns, president of World Omni Financial Corp., an auto finance company that is part of JM Family Enterprises Inc. Bums spoke this month at the annual meeting of the American Financial Services Association, which preceded the National Automobile Dealers Association convention.

Some dealers who attended the NADA convention said lenders are shifting more responsibility to them for failed subprime deals or are canceling lending agreements. Others cited tougher criteria for subprime loans.

Travis Christensen, sales manager of Mark Miller Toyota in Salt Lake City, said Capital One Auto Finance is demanding larger down payments on subprime loans. "That could mean switching the customer to a car they don't necessarily want”, to he said.

(Sub) prime cut
Many independent lenders are cutting back on subprime vehicle loans. They are:
• Leaving the subprime market
• Canceling loan arrangements with auto dealers
• Requiring larger down payments
• Raising interest rates on subprime loans

Tougher Rules

Among major lenders, Chase Auto Finance CEO Marc Sheinbaum said his company is shunning subprime loans longer than 72 months, calling them "a volatile part of the market.

“AmeriCredit Corp. said it is slashing subprime loan volume this year.”Our loan volume was $9 billion last year," said AmeriCredit CEO Dan Berce. "But we expect it to be $5 billion to $6 billion in 2008."

Last December, subprime loans made by AmeriCredit had an average retail interest rate of 16.5 percent, the company says. The rate for prime customers was 9.7 percent.

Although subprime loans can be lucrative, Wall Street has grown skittish about rising loan defaults. "This is a very difficult environment for a company like ours," Berce said. "Capital markets are very difficult to get money from and at an affordable rate."

Last month, Wells Fargo Auto finance told dealers it would not finance customers with credit scores below 540. Credit scores generally range from 300 to 850; most are from 600 to 800.

Mechanics Bank, a major California lender, stopped buying finance contracts from dealers in January. Thomas Brennan, a bank vice president, cited "the deteriorating profitability of indirect retail financing."

Sovereign Bank, of Reading, Pa, has stopped writing auto loans in the Southwest and Southeast. The bank has retreated to its original business territory in the Northeast.

To the rescue
At the same time, captive finance companies say they are willing to "buy deeper" than outside lenders. "Our underwriting criteria have been constant over the past five years," said Mike Bannister, CEO of Ford Motor Credit Co.

George Borst, CEO of Toyota Financial Services, said his company does not focus on subprime loans but will make them to help dealers close sales.

Likewise, GM and Chrysler dealers say they can finance loans for subprime customers through captives.

Some independent lenders, such as Wachovia Dealer Services, aren't backing away from subprime loans. "We are comfortable with the quality of our portfolio," said CEO Tom Wolfe.

Dealers say lenders are getting tougher even on nonprime customers who have slight credit blemishes. And David Duncan, general manager of Duncan Ford Mazda-Lincoln ·Mercury in Blacksburg, Va., said he is seeing changes in his dealership's agreements with lenders.

"What the lender used to assume responsibility for is becoming our responsibility," Duncan said. "If the deal fails, it's the dealer who has to buy the contract back.”

How Consumers Perceive Their Financing Chances

Ward's Dealer Business, Feb 1, 2008 12:00 PM

The following are key findings from a survey on consumer perceptions of how the subprime mortgage debacle may affect their ability to get a car loan.

Youths Feel at Risk. Concern increases with younger respondents; 45% of 18-24 year olds are concerned, along with 43% in the age 25-34 group, compared to only 15% in the 65+ age bracket (individuals who are less likely to be seeking credit for a car or other big-ticket item).

Concern Matches Credit Need. By income, the greatest concern (43%) lies in within the $25,000-$50,000 segment, people with enough income to have an interest in a car loan, but not so much that they don't need the loan.

Kids Raise the Stakes. Respondents with children in the household — and are more likely to be in the market for a car loan — expressed greater concern (44%) than respondents in households without kids (27%).

Credit Impact Already Felt. For some of those in the lowest income bracket, this isn't a theoretical question; 12% say their credit has already been affected.

Genders Share Concerns. Men are marginally more concerned than women — 35% to 32%, but 6% of women and only 2% of men say their credit has already been affected.

Employment Offers Little Relief. Having a job doesn't significantly diminish these concerns. While 40% of the unemployed say they are “extremely” or “somewhat” concerned, 37% of those employed full-time feel the same way.

Dixie Worried. The perceived credit squeeze is hitting the South hardest, with 40% expressing concerns, about 10% higher than any other region.

Marked Racial Divide. The racial disparity is even more pronounced — 52% of nonwhites expressed concern vs. 30% of whites.

Repo lots overflow with reclaimed cars

By Chris Woodyard, USA TODAY
February 14, 2008

Car and truck repossessions this year are headed for the highest level in at least a decade, thanks to easy credit and a faltering economy, says an economist for one of the largest wholesale auto auction services.

So many vehicles are being snatched from owners who stop making payments that some repo operators and auto auctioneers say lots are overflowing
.
This year's predicted 10% rise in vehicle repos to 1.6 million would be a third higher than 10 years ago, says Thomas Webb, chief economist for a unit of Atlanta-based Manheim, which sells cars to dealers worldwide. The increase comes atop a 10% rise in repos last year.

Webb blames overly "generous" auto loans in the past couple of years as a key factor in driving up defaults that lead to repossessions.

He says the rate might be even higher if employment hadn't remained strong despite the slowing economy.

An executive at another big auto auctioneer says that easy subprime car loans in recent years are a big reason for the flood of repossessed cars.

"We're experiencing significant growth in repo volume to the point where we're using additional lots to store them," says Tom Kontos, executive vice president of Indiana-based Adesa Auctions. "Our inventories are growing to record levels," caused by repos on top of a glut of cars coming off leases and out of rental service.

While the nation has been transfixed by rising home foreclosures, scant attention has been paid to what is usually a consumer's second-largest purchase: their car or truck.

Wells Fargo, (WFC) for example, reported last month that it charged off $1 billion in auto loans last year, 3.5% of its portfolio, compared with $857 million in 2006. The bank says it expects a higher write-off rate this year.

The rise of bad loans, however, has meant busy times for "repo men," whose work can involve seizing cars from driveways in the dead of the night.

"Our business has skyrocketed," says Patrick Altes, president of Falcon International in Daytona Beach, Fla. In recent times, his service saw a first wave of defaults that involved picking up boats and recreational vehicles.

Now, it's cars and trucks, often in affluent neighborhoods.

"A lot of the vehicles we're getting are high-dollar pickups" whose owners got caught in the construction downturn, Altes says.

The repo surge has boosted business for locksmith Amy Palmer. She makes new keys for seized vehicles at Manheim's auction lot in Ocoee, Fla., one of Manheim's 144 locations in 14 countries.
"It's phenomenal," she says. "If you're not paying for your house, who is paying for the car?"

Lower-Priced, Higher-Mileage Used Cars Still Diamond in Rough

By Richard Greene, AR NewsMagazine Editor February 07, 2008

ATLANTA — As the general economy continues to erode, Manheim's chief economist did find a significant bright spot that has major implications for used-car operations. The demand for lower-priced, higher-mileage units presently remains strong, Tom Webb pointed out in his monthly market evaluation.

"Despite the overall softness in the market, lower-priced units (less than $5,000) showed no significant weakening of pricing, even with considerably higher volumes being offered," Webb explained. "Some of this strength extended up into the subprime repossession and end-of-service commercial fleet markets, which generally have average transactions prices in the $7,000 to $8,000 range," he added.

But for the most part, Webb's analysis of market conditions was rather bleak. Reflecting reduced floor traffic, lower closing rate and tighter retail financing market experienced by most dealers, wholesale used vehicle prices fell for the fourth consecutive month in January, according to Webb. The prices are on a mix, mileage and seasonally adjusted basis, he indicated. Webb reported that the Manheim Used Vehicle Value Index reading registered at 109.1 for the month, which he said represented a 3.7-percent decrease from the prior January. "Although incentive activity rose in January, and looks to increase again in February, aggregate new-vehicle inventory counts remain low," he noted.

Webb pointed to several overarching economic concerns in his monthly report.

— The labor market weakened further. "Initial jobless claims surged in late January and non-farm payrolls posted their first monthly decline since August of 2003," Webb said. "Signs suggest that job growth will remain soft, at best, for several months. "

— Credit conditions tightened. "It is nigh impossible to get healthy job gains as long as the credit markets continue to restrict availability," Webb explained. "Rates don't matter if it only means being turned down for a 5-percent loan rather than being turned down for 7-percent loan." Webb noted that the Federal Reserve Board's Survey of Senior Loan Officers in January revealed that more than half of all banks have tightened credit standards for prime mortgages and that more then three-fourths have tightened for non-traditional or subprime mortgages. "The net percentage of banks raising standards for consumer installment loans increased to one-third, up from one-fourth in the October survey," he said. "It was the highest percentage of banks reporting tighter consumer credit standards in more than a decade. And the tightening has also extended to commercial loans."

— New vehicle sales dropped in January, as did inventory levels. "Although the seasonally adjusted annual rate of new-vehicle sales slipped to just 15.2 million in January, production cuts continued to whittle at inventory levels," Webb observed. "Although incentive activity did (and will continue to) increase, low inventory counts mean that manufacturers have been able to target monies to specific models and/or regions of the country. "As such, the negative impact on late-model used vehicle residuals has also been selective," he added.

— All market classes of used vehicles register year-over-year price declines. "SUVs, pickups and sports cars are down the most (more than 5 percent), while compact and midsize cars are down the least (less than 2.5 percent," Webb said.