Tag Archive | "loans"

Spending on New Cars Hits All-Time High, Even as Loans Stretch to Record Lengths

While May might not have brought the big uptick in sales we’ve seen in recent months, preliminary data suggest that automakers took in record revenues, with the average transaction price of new cars, trucks and crossovers sold last month climbing by at least 4%, reports The Detroit Bureau. 

All told, U.S. buyers spent a record $52 billion for their new vehicles in May, in part, due to a sharp, year-over-year decline in incentives, according to several firms that track monthly sales data. A separate study suggested that motorists are covering those higher costs by stretching their loans out longer than the industry has ever seen, an average 67 months.

“New vehicle sector and segment preference indicates consumers are confident about the economy and their finances,” said TrueCar President John Krafcik. “Not only are these shifts to premium brands and utilities telling from an economic indicator standpoint, they signal sizable revenue gains automakers should reap this year.”

The data tracking firm estimated that the typical vehicle had an average transaction price, or ATP, of $32,452, up 4% rom May 2014. Lower incentives played a role, but manufacturers have also seen buyers show more confidence by loading up on options and by trading up to higher-level vehicles. TrueCar estimated sales of premium brands jumped 10.6% during the first four months of 2015 compared to just 4.8% for mainstream brands.

BMW and its Mini subsidiary, saw prices jump in May by 6.5%, according to a separate analysis by Kelley Blue Book. Mazda saw a similar increase, while Ford and General Motors prices climbed a more modest 4.3% and 4.2% respectively. Toyota’s average price rose just 2.3%, even though it trimmed incentives by more than 10%, year-over-year.

With only a handful of exceptions, notably including General Motors, Hyundai and Kia, most makers trimmed rebates and givebacks as the U.S. auto market continued to gain ground. And analysts noted that the modest overall sales numbers for May actually misrepresent the market’s momentum, as the peculiarities of the industry’s reporting system counted fewer so-called “sales days” last month than in May 2014.

The surge in spending also reflects a year-long shift from fuel-efficient small cars and alternative-power vehicles to larger passenger cars, pickups and SUVs.

“With the national average price of gasoline down nearly a dollar per gallon on average from one year ago, truck and SUV demand remains strong, elevating average transaction prices,” Karl Brauer, senior analyst for Kelley Blue Book, said in a statement.

The steady climb in new car prices might come as a surprise to those worried about relatively stagnant middle-class earnings and the rising wealth gap. In reality, most new car buyers today register on the upper end of the middle-class spectrum. Even for compact cars, industry research often shows household income levels approaching six figures.

And buyers are simply stretching out their purchases to hold down monthly payments – while also encouraged by continuing low interest rates. Gone are the days of three and even four-year loans. Borrowers extended their loans terms during the previous quarter to 67 months on average, longer than ever for new cars, according to Experian Automotive.

“While longer term loans are growing, they do not necessarily represent an ominous sign for the market,” said Melinda Zabritski, Experian’s senior director of automotive finance.

On the plus side, the trend allows consumers to buy more vehicle without busting the household budget. On the downside, however, it means they likely have to keep those vehicles longer in order to avoid being upside-down on loans when trading in, cautioned Zabritski. That could foretell slower future growth of the automotive market.

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The Future of Small Business Borrowing

One of the interesting business trends to have witnessed going back a decade is how small business owners have chosen a loan source. But the future trend should be even more interesting, reported FoxBusiness.

Looking back, there have been primarily three sources of loan funds for growing small businesses:

  1. Large, multi-state banks
  2. Community banks, locally owned and managed
  3. Credit unions, also locally determined

In a recent online poll we asked small business owners about their borrowing preference. One-sixth of our respondents chose “large bank,” which is down from a decade ago. Following the 2008 financial crisis large banks stopped lending to small business while they struggled with their own regulatory stress test. They’re lending to small businesses again, but are now in catch-up mode.

One-eighth of our sample selected “credit union,” which is higher than the past. Much to the chagrin of banks, credit unions have expanded their customer profiles to include small businesses, aren’t taxed like banks, and aren’t subject to community reinvestment requirements. I predict the credit union loan option will grow for small businesses going forward.

More than two-thirds of our small business audience told us they borrow from community banks. The Independent Community Bankers of America (ICBA) report they make almost 6 of 10 small business loans nationally, so our folks are a little more active with these lenders. Perhaps, since I’ve long espoused the natural symbiosis between Main Street businesses and community banks, I’ve influenced my polling audience to move this needle beyond the national average.

The big news of our poll is that crowdfunding popped up on the lending radar for the first time. The number was only 3%, but this credit source is very new.

Right now crowdfunding loans fit small businesses that aren’t bankable for one reason or another, but are strong enough to handle the associated higher interest rates. I predict over the next decade crowdfunding will claim a larger piece of the small business loan pie for three reasons:

  1. Crowdfunding rates will become more competitive
  2. It won’t have banking regulatory challenges
  3. The virtual, online aspect of crowdfunding will appeal to the next generation of entrepreneurs

Recently I attended a convention of bankers and asked several of them what they knew about crowdfunding. Most had not heard the term, only a couple of those who had heard of crowdfunding knew how it worked and none understood the future implications to their industry.

Bankers, call your office.

Write this on a rock …

Small business borrowing will be a lot different in 2025.

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ABA: Delinquencies Continue Broad-Based Decline in Q3 2014

WASHINGTON — The American Bankers Association (ABA)’s chief economist said this month he is optimistic that the economy will continue its upward trend. Driving his positive outlook are rising consumer confidence and falling delinquency rates.

In the third quarter 2014, delinquencies for seven out of the 11 credit categories monitored by the ABA showed declines. Its composite ratio, which tracks delinquencies (30 days or more) in eight closed-end installment loan categories, fell 6 basis points to 1.51% of all accounts — a record low that is well under the 15-year average of 2.30%

“Consumers are on surer financial footing, which bodes well for future delinquency rates,” the ABA’s Chief Economist James Chessen said. “While people are clearly ready to spend again as economic activity picks up, the overwhelming majority of consumers continue to keep debt at manageable levels.”

He added that strong economic growth has boosted job creation and supported income growth, making it easier for consumers to meet their financial obligations. Lower gas prices, he noted, are also helping to free up resources for everything from new purchases to debt repayment.

The association noted that the delinquency rate for auto loans originated through the direct-to-consumer channel remained flat from a year ago, while the delinquency rate for auto loans originated through auto dealers fell from 1.55% in the year-ago quarter to 1.51%.

“Consumers are smiling every time they fill up their tanks,” Chessen said. “ Every one-cent decline in pump prices puts about $1 billion back into consumers’ pockets, which means their paychecks are going much further. The signs are pointing in the right direction, but consumers hold all the cards when it comes to continuing to prudently manage their finances.”

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U.S. Authorities Accuse Toyota Arm of Discriminatory Loan Pricing

Toyota Motor Credit Corp, the lending arm of Toyota Motors Corp, could face an enforcement action from U.S. authorities over its pricing of auto loans through dealerships and could be forced to reimburse borrowers or pay a fine, the company said late Friday, reported Reuters.

On Nov. 25, the U.S. Department of Justice and the Consumer Financial Protection Bureau sent a letter to Toyota Motor Credit, saying that its auto lending practices “resulted in discriminatory pricing of loans to certain borrowers in contravention of applicable laws,” the company said in a filing with the U.S. Securities and Exchange Commission.

Unless Toyota Motor Credit agrees to a resolution with the agencies voluntarily, which would include “monetary relief” in addition to changes to its loan pricing policies, the Justice Department and the CFPB were prepared to bring an enforcement action, the filing said.

Toyota Motor Credit added it would work with the agencies to reach a resolution.

A spokesman for the CFPB declined to comment. A spokeswoman for the Department of Justice did not immediately respond to a request for comment.

In December 2013, Ally Financial Inc (ALLY.N) was forced to pay $98 million to resolve similar discriminatory loan pricing charges from the Justice Department and the CFPB.

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Lincoln, VW Captives Rank Highest in Customer Satisfaction, JD Power Reports

WESTLAKE VILLAGE, Calif. — Auto finance sources cannot focus their efforts on only one or two areas of the financing process and expect to have satisfied customers; they need to excel in all areas throughout the life of the loan or lease. That was the conclusion of J.D. Power and Associates’ 2014 U.S. Consumer Financing Satisfaction Study.

This year’s study, which looks at auto loans originated in the indirect and direct-to-consumer channels, includes used-vehicle financing. The firm also expanded the period in which customer satisfaction with a finance source is measured from one year to four years. Key factors studied included on-boarding process, billing and payment process, website, and phone contact. The study was also conducted in two vehicle segments: luxury and mass market. Satisfaction is calculated on a 1,000-point scale.

“Satisfying auto financing customers is not contingent on excelling in one area; it’s a continuum across the entire process, with the stage set during the on-boarding process — or the initial discussion with customers — and continuing through the billing and payment process,” said Mike Buckingham, senior director of the automotive finance practice at J.D. Power. “The execution of finance process best practices is more important than the innovation of new tools to complete transactions. All lenders use mostly the same technology, but the ones that execute better across all areas are the ones with the most satisfied customers.”

Buckingham noted that technology does play a key role during the billing and payment process, which is the factor with the most impact on overall satisfaction. Many customers seek not only self-service tools to set up an automatic payment system, they also want tools to confirm that their payments were received and processed and to check the balance of their account, with many preferring to conduct these activities using their computer, tablet or smartphone.

“Lenders need to make it easy for customers to access their account anytime anywhere,” said Buckingham. “That means providing a website and apps that are reliable and that make the most critical elements of the billing process easily identifiable.”

The study also found that overall satisfaction in both the luxury and mass market segments is significantly higher for loans on new vehicles (844) than on used vehicles (817). That difference is driven largely by significantly higher satisfaction in the billing and payment process and website factors among customers with a new-vehicle loan origination (846 and 840, respectively) than among those with a used-vehicle financing origination (819 and 817, respectively).

The loan and lease experience differs by segment, with overall satisfaction in the luxury segment significantly higher for leases (847) than for loans (840). The opposite is true in the mass-market segment, where satisfaction is significantly higher for loans (815) than for leases (807).

Ensuring customer satisfaction is critical for finance providers, as more than 90% of highly satisfied customers (overall satisfaction scores of more than 800 points) indicate they “definitely will” use their current lender in the future. Further, more than 50% of customers indicate that they selected their provider based on inputs other than dealer recommendations.

Avoidance of billing and payment errors is the most influential key performance indicator impacting satisfaction. Incorrect payment amounts listed on statements, misapplied payments, or incorrect/not updated personal account information leave customers with a perception that their finance provider is disorganized.

For the second consecutive year, Lincoln Automotive Financial Services (867) ranked highest in the luxury segment and performed highest in the billing and payment process and website factors. Lexus Financial Services (859) ranked second and Audi Financial Services (854) ranked third.

Volkswagen Credit ranked highest in the mass market segment with a score of 836. It also had the highest scores in billing and payment process (tied with Ford Credit) and website. Ford Credit ranked second with a score of 835 and Honda Financial Services ranked third with 829.

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SBA Loans Are Shrinking — And That Might Be Good News

The Obama administration has for the third consecutive year approved a smaller volume of government-backed small-business loans. But that’s not necessarily bad news, reported The Washington Post.

Small Business Administration officials this past year approved federal guarantees supporting $28.6 billion in small-business loans, according to SBA figures. That’s about $1 billion short of last year’s total and down from a peak of $30.5 billion in fiscal 2011.

Under its lending programs, the agency agrees to pay back banks, credit unions and other private lenders if a borrower defaults. Generally considered the agency’s top priority, the loan programs are meant to encourage banks to provide capital to small businesses that might otherwise struggle to secure credit.

On the surface, then, the steady decline seems alarming. It’s not.

While the total dollar figure has dropped in each of the past three years, the number of loans approved for guarantees has increased in each of those years. In 2014, nearly 58,000 loan applications were approved, up from 54,106 last year and 53,848 in 2012. So, more small firms are receiving capital even though the amount they’re receiving may have shrunk.

Moreover, small-dollar loans are exactly what many small businesses have been saying they can’t get their hands on, especially in the wake of the financial crisis. Data from the Federal Deposit Insurance Corp. echoes that, showing that small commercial loans are down about 20 percent since the years preceding the recession, even as banks’ total commercial loan balances have expanded.

“For most banks, lending to small businesses, especially in the lower dollar range, is costly and risky,” Karen Mills, former SBA administrator, wrote in a recent article published by the Harvard Business School.

The crunch has led the agency to shift its focus to smaller loans — often called microloans. Starting in 2014, the agency waived all fees on loans of less than $150,000. Consequently, the number of loans approved below that threshold rose by 23 percent this year, with the volume of loans under $150,000 climbing 29 percent to $1.86 billion.

Also, a closer look at the loan numbers reveals that the agency’s recent drop in volume can be attributed to a decrease in lending through the smaller of its two signature loan programs, known as the 504 program, under which companies can finance large investments such as buildings or machinery. Meanwhile, the agency’s much larger initiative, the 7(a) program, under which funds can be used for a broad range of expenditures such as starting or expanding a company, posted record highs in terms of number of loans (52,044) and volume ($19.19 billion) this past year.

The 504 program’s lending volume, it appears, was inflated in 2011 and 2012 when Congress approved legislation permitting small businesses to temporarily refinance certain assets through the 504 initiative, which provides attractive, typically below-market rates to borrowers.

The 504 refinance program, which expired in late 2012, appeared in President Obama’s most recent budget proposal, while a bill to reinstate it has garnered support on both sides of the aisle in Congress. If approved, a rebound in 504 could push the agency’s loan volume back into record territory.

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