J.D. Power insight on subprime new-car paper with 0%, 84-month terms

Typically, the most attractive new-vehicle financing terms and rates from captives only are granted to consumers who reside in the highest credit tiers.

With more than 30 million workers now unemployed and trillions of dollars in federal assistance being pushed into a U.S. economy nearly grounded completely because of the coronavirus pandemic, these certainly are not typical times.

However, new information from J.D. Power indicated that captives are funding deals to non-prime and subprime customers with their most generous terms and rates but at what might be considered a prudent pace.

Of the new-vehicle financing completed between March 1 and May 4, J.D. Power reported just 4.5% of that paper with the most generous offerings — 0% APR for 84 months — went to individuals whose credit scores fell into the non-prime or subprime credit tiers. J.D. Power explained credit scores for its analysis are derived from FICO 2008 Auto at the date of origination with the tiers being:

Super-prime: 740 and above

Prime: 660-739

Non-prime: 620-659

Subprime: 619 and below

In a message to SubPrime Auto Finance News, Michael Buckingham, managing director of PIN Auto Finance at J.D. Power, said, “Overall the credit quality is very good.”

Buckingham pointed out that overall loan-to-value metrics were higher overall during this reporting period.

“But keep in mind these loans are with higher credit score consumers who may be taking advantage of 0% APR,” he said. “Why put a down payment when you can redeploy those funds elsewhere?”

Buckingham shared another note about the 0% APR, 84-month offers often highlighted in stirring television commercials filling the airwaves since the crisis began.

“Not everyone needed to be a ‘well-qualified buyer’ to get 0% for 84 months,” Buckingham said. “One of the Big 3 captive/OEMs was offering this program across the board and drove approximately more than half of the non-prime and subprime 84-month, 0% loans during this period.

“I’ll also add that the advances on that chunk of business were generally in-line with their peers,” he went on to say.

Source: J.D. Power

Incentive spending per unit hits record high

In a separate analysis, J.D. Power also discussed the amount of incentives automakers are connecting to new vehicles to help dealerships retail these units.

Analysts said incentives hit a record level of $5,000 per unit for the week ending May 3. Week-over-week increases were driven by higher premium share and lease mix, according to J.D Power’s COVID-19 Auto Industry Impact Report released on Wednesday.

J.D. Power also mentioned incentive activity for premium brands increasing, too.

“Although incentives on premium brands remain far less aggressive than non-premium brands, there have been multiple enhancements to premium incentive programs over the past several weeks,” analysts said.

“A majority of premium brands now offer 90-day payment deferrals and Audi, Lincoln, Jaguar Land Rover, Volvo and Infiniti are all offering 0% financing on certain models,” J.D. Power continued. “None, however, have launched 84-month financing offers similar to those available on non-premium vehicles.”