When Americans finally start to buy new cars again, they may find it’s not so easy to finance the purchase.
Over the past several months, banks have tightened standards and the government’s program to make it easier for consumers to get loans has been slow to take off. [Editor's note: The original version misstated the deals being offered by captive auto finance companies.]
Enter the American Automobile Association (AAA), which has 51 million members, most of whom … yes, drive and buy cars.
AAA is now working on a plan – to be officially announced in the next several weeks – to knit together banks and credit unions to provide financing for people to buy that new buggy. “We want to give easier access to people who want to buy a car, not just our members, although we would have some value added for them,” says Bill Gerhard, director of bank products for AAA Financial Services in Heathrow, Fla.
The plan would be for potential buyers to make one phone call – think 1-800-AAACARLOAN (not a real number) – or go to one website to apply for a loan. “Then, behind the scenes, we can look at your FICO score [credit score], go through some filtering techniques and find the lender best suited for you,” says Mr. Gerhard. “Instead of you doing the legwork, we should be able to do it in one application.”
Bill Hardekopf, a consumer finance authority at LowCards.com, thinks the concept makes sense. “I would imagine banks would want to do it for the sheer volume of the business it would bring,” he says. “And, they have the type of demographic [that] banks would want since banks want to minimize their risk as much as possible.”
The current interest rates on auto loans range from 5 percent to 7 percent, depending on the term of the loan and if the loan is for a new or used car, says Gerhard. This is historically low.
But since last fall, the market for reselling many of these loans, which are bundled into securities called Asset Backed Securities, dried up. “Essentially, that trickled down to the borrowers, and for a while there, the only deals getting done were for people with very high FICO scores,” says Chris DeReza, an analyst at Informa Global Markets, an online provider of information on financial deals.
On Wednesday, Informa reported that investors snapped up a $1.125 billion auto-finance deal, indicating at least some movement in the market. So far this year, some $9.25 billion in consumer-related finance deals – not government-guaranteed – have been done. “This is dramatically lower than past years,” says Mr. DeReza.
In the first two months of the year, the government Term Asset-Backed Securities Loan Facility (TALF) has financed $11.5 billion in consumer-related loans. However, many potential investors in these deals are wary, analysts say, of the government’s terms and conditions.
If AAA does implement its program, DeReza says it could have a positive impact on the auto financing market. “They have a great member reach, they have great reputation, they are trusted by their membership base,” he says.
To AAA’s Gerhard, offering the service makes sense since the group has automobiles as part of its DNA. “Our relationship is tied to the car. All our members own vehicles and they want valuable products and services, and financing is a big part of it, especially in today’s environment.”