Automotive lenders are hurting these days but some see a silver lining, however tarnished.
Despite tough economic conditions affecting auto sales, there are positives, says Mark M. Pregmon, an executive vice president at SunTrust Banks Inc.
For instance, rising gasoline costs will spur dealership transactions as consumers trade in gas guzzlers for new fuel-efficient vehicles, Pregmon says at the Consumer Bankers Assn. auto finance conference in San Francisco.
He adds that as the economy slows, demand for used autos will rise, which could aid dealers who tend to make more money on used vehicles than on new.
And although the housing downturn will get worse before it gets better, “it will get better,” Pregmon says.
A downturn in the housing market was expected, but not with the severity of what occurred, he says. “It took us by surprise and it has affected auto loans.”
He also is concerned about the “sobering” but growing popularity of auto loans with protracted terms of 72 and 84 months.
“With the longer terms, there is a greater chance something will happen to the consumer,” Pregmon tells Ward's. “Losses for lenders increase. If a car is repossessed, it costs the lender more because the consumer has less money in it.”
Longer terms can hurt consumers, too, even if they pay off the loan on time. At 84-month terms, a $20,000 car will cost an additional $5,335 in interest alone — almost a quarter of the cost of the vehicle, says LeaseTrader.com.
Pregmon, who is chairman of the CBA Automobile Finance Committee, advises lenders to stick to fundamentals, focus on auto dealers and their customers and “go for a ‘wow’ factor to distinguish yourself from others.”
Lenders doing that will come out better, he says. “But it's tough to make money these days. Typically, we manage our business on a long-term basis; now it seems to be day to day.”