NonPrime Auto Lenders

The National Automotive Finance Association (NAFA), which represents nonprime automobile lenders, has released its annual survey of nonprime automobile lenders for calendar year 1998. One of the most interesting aspects of the study is the “efficiency index;” that is, the percentage of loan applications that results in loans booked. The contrast between the prime and nonprime lenders is striking and explains much of the high costs of making nonprime loans. The table below compares the efficiency indexes for new and used auto loans of nonprime lenders with data reported by the Consumer Bankers Association (CBA) for the same year. Results are consistent with surveys in earlier years. The data are weighted by the size of respondent in order to give greater weight to the larger firms. 

Automobile dealers selling to nonprime consumers find that they must “shop” the paper to a number of banks and finance companies in order to find a lender offering acceptable terms. Observe that approval rates are much lower for NAFA lenders than for CBA banks and finance companies. However, even having approved the loan, a lender may not be able to book it, since car buyers also shop for the loan—or simply decide that they cannot afford to buy the vehicle. The end result is that nonprime lenders ‘ ultimate success rate, or efficiency ratio, is a third that of the CBA lenders on new-auto loans and less than half the CBA rate on used-auto loans. Screening the applications and shopping for a lender costs money and helps to explain why finance rates on nonprime loans are significantly higher than rates on higher-quality loans.