By on May 18, 2010

As non-executive vice-chairman of the Swiss bank UBS, Chrysler CEO Sergio Marchionne has deep connections with the European banking community. Now, under threat of losing its primary lender Ally Financial to GM’s dreams of a return to in-house, subprime lending, Marchionne has leveraged that experience into a non-prime lending deal with a US division of Spain’s Banco Santander. Automotive News [sub] reports that Santander and Chrysler have reached a deal to provide loans to Chrysler customers with sub-650 credit scores that ChryCo reckons could result in an additional 2,000 sales each month.

Chrysler and Santander already enjoy close ties, as about half of all Chrysler dealers use the Spanish bank for used-car financing. And that’s not all: Fiat-owned Scuderia Ferrari recently closed a deal in which Santander would become a major sponsor of its Formula One team. Under the just-closed Chrysler subprime deal, Santander will save non-prime customers 30 percent on their car loan costs, which works out to about $3,000 in savings over the life of the loan. According to Chrysler, some 22 percent of its customers fall into the credit-score range addressed by the new program.

But the Chrysler-Santander deal isn’t being done on the strength of close ties alone. AN [sub] reports that Chrysler is subsidizing these subprime loans, although officials are refusing to disclose the size or nature of this investment. The only thing that Chrysler spokesfolks will say is that:

Santander specializes in this credit market. They know how to finance it. They don’t do prime lending. They have plenty of money. There is not a liquidity issue.

Your move, GM.

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25 Comments on “Chrysler Beats GM To Non-Prime Loan Deal...”

  • avatar

    Sub-prime financing arrangements for a sub-prime auto company.

  • avatar
    Rusted Source

    I guess there’s no such thing as a lesson learned. The finger that points blame for the financial meltdown tends to jump from here to there, but in my opinion there’s a universal problem: people not living within their means.

    Why do car companies cater to hocking their wares to people who can’t afford them? I’m not saying these people are not entitled to owning a car but I guess they never heard of a little word called “Used”.

    I guess it will be just a matter of years before we’re facing FM 2.0

    • 0 avatar

      “I guess there’s no such thing as a lesson learned.”

      Yeah, what could possibly go wrong with their cunning plan?

    • 0 avatar

      Many moons ago (late 90’s) I used to call on a dealer that sold new cars to people who clearly couldn’t afford them. A few months of struggling with their payments and all of the sudden the car had “mysterious” problems that no one could verify like intermittent misfires, stalling or hard/no start. Most of these folks managed to get the car bought back either through arbitration or lemon law, and not surprisingly there was never a defect found in the car after it was reconditioned and resold.

      When I asked the dealer why they didn’t just put these folks in a clean sub-$5,000 car, they replied that that they couldn’t get the loan bought since the buyers generally had no money for a downpayment. So how then could they get bought on a new car you ask? Simple – the dealer was using the various rebates on the car and calling that the “downpayment” and the lenders would buy off on it. Stupid, stupid, stupid….idiotic banks would rather take a risk on a subprime buyer on a $15,000 car and a payment beyond their means because of an “invented” down payment instead of a $5,000 loan and a reasonable payment with no money down. The sad part is that since most of those cases went lemon law or arbitration as noted above, the bank wasn’t out anything and the manufacturer bore the brunt of the loss, so I guess their strategy worked for them after all!

  • avatar

    I was going to comment this in the GM article, but here or there is the same. Or the lessons from the crisis haven’t been learned/internalised or the risk of operating in that market is “acceptable”. In any case, the seeds for the next meltdown are being planted, again.

    @Rusted Source, “used” is a nasty word in this Politically-Correct-full-of-pussies-world days. It’s better to use “pre-owned”, but that will also present the inconvenience of the interwebz meaning. A new word will have to be found for describing a non-new vehicle (ISO-9000 to the rescue).

  • avatar

    There are plenty of potential buyers who have sub-650 credit scores for one reason or another but can afford the payments on a new car. I’m not qualified to assess whether it’s worth the risk to lend to these folks, but don’t assume that “sub-prime” is equivalent to “can’t afford it.”

    • 0 avatar

      I’m not qualified to assess whether it’s worth the risk to lend to these folks, but don’t assume that “sub-prime” is equivalent to “can’t afford it.”

      I’d only agree with you if these sub-prime buyers were making a substantial down payment – which is not the case 90 percent of the time.

      Face it – many of these loans – some as long as 60+ months – are the equivalent of paying a rent-to-own shop $40/week over a year for a $1000 (retail) flat screen.

      That Chrysler’s wants this financially unsophisticated market speaks volumes. Heck, they should find whatever rock Bill Heard is hiding under and offer him a job marketing this crap.

  • avatar

    So why is it ok for Honda to sell 1 in 5 vehicles to ‘sub-prime’ buyers but not for GM which currently only sells 1 in 100 vehicles to those buyers? An additional 15% more vehicles sold would probably make a huge difference to their bottom line.

    • 0 avatar

      Where can you prove that Honda sells 1 in 5 cars to sub-prime buyers? In fact history is the opposite in this spectrum as the D3 relied heavily on loose credit to sell their cars. You’d corner the market as you’d have customers that could not get financing from other automakers (including Honda). In fact I used to work at a Honda / VW dealer back in the day and when someone would come in with their 3 year old Taurus or Malibu or Sebring with a 60 month 7%+ (credit risk) loan with a payoff that was 3x-4x greater than the trade value of their car. In addition to being so much upside down they had a bad credit rating. After explaining it to them that they should not buy a car now – not b/c we can’t sell it to them but b/c they are going to ruin their credit rating and put themselves even more in debt – we’d watch them cross the street to the Ford/ GM / Chrysler or Mitsubishi dealers then later that day watch them drive out new or used car (one that may not have been as good as their trade in!). Our finance manager would get mad b/c Honda wouldn’t let us get these customers but if you have to repo and often go through collections to get paid / $ back – in the long run Honda or VW was better off.

    • 0 avatar

      I doubt that Honda sells 20% of their vehicles to subprime borrowers. A lot of their sales are either leased or financed through HFS, and they don’t dabble in the subprime market. A lot of their buyers are well-educated people with stable jobs.

    • 0 avatar

      Read here for the info about Honda.

      We are talking about subprime autos. Not the subprime mortgage industry that blew up. All auto manufactures deal in this business. For the record, well-educated with steady jobs doesn’t mean they aren’t subprime.

    • 0 avatar

      Interesting that they do sell 20% to sub-prime buyers today. It must be a more recent trend or adaption to the credit problems facing most Americans as easy credit is everywhere. Honda was always more tight on credit to risky buyers. It must be b/c the Gov’t owns part of Chrysler and GM that they set the 1% rules b/c historically GM would sell to those who simply had a pulse. Maybe a reason why GM / GMAC needed the bailouts and a golden bankruptcy in the first place.

  • avatar

    I’m surprised 650 is now considered questionable. I’ll keep driving 5 – 10 year old, paid off cars as long as possible, even when it’s not fashionable anymore….I’m currently looking for a 91-95 535i with manual for my fun car / occasional daily driver.

  • avatar

    It’s not Chrysler’s job or the dealer’s job to enforce anyone’s version of what a customer should do with their money. If someone wants to make a bad financial decision, it should be their choice. That’s part of living in a free country.

    I see customers all the time that make 6 figure incomes with credit in the 600s and even lower because they are just bad with money. I am not going to turn down their business if a bank is willing to take on the risk.

    In a perfect world everyone would pay cash at MSRP.

    • 0 avatar
      Rusted Source

      It’s not Chrysler’s job or the dealer’s job to enforce anyone’s version of what a customer should do with their money.

      Sounds familiar.

      It’s not [the mortgage lenders’] job to enforce who it able to afford a house when the scheduled borrowing rates jump through the roof in a few years.

      See where that got us.

    • 0 avatar

      Rusted Source:

      There are some problems with your argument, but the crux of the matter is that it *IS* the lender’s responsibility to manage their own risk.

      Auto loans that I’m aware of are generally fixed-rate regularly scheduled payment deals, not fancy interest-only or adjustable-rate long-term loans dependent on collateral appreciation for future refinancing. Accepting such a product on a home reflects poorly on the home buyer’s decision to manage their own risk. Offering such products with 100% or more loan-to-value ratio in sums exceeding Jumbo threshold with minimal documentation of the borrower’s ability to repay reflects poorly on the lender’s ability to manage their own risk.

      In other words (adjusting magnitude of $ downward to reflect proportionately wider scope than an individual basis), when you owe a bank thousands of dollars you have a problem; when you owe a bank hundreds of thousands of dollars the bank has a problem.

  • avatar

    There are two recurring major misconceptions repeated in the responses on both this thread and the GM subprime one.

    1) the subprime auto financing model has existed for decades sucessfully so it is not as though Chryco or GM are entering a risky new venture in financing. In fact they’re not even entering into something new.

    2) the subprime mortgage meltdown has absolutely nothing to do with subprime auto financing, there isn’t even a remote resemblance in the two.

    All either are doing is regaining the financing ability they have had for decades. A manufacturer without a captive finance arm is at a distinct competitive disadvantage. Lack of the availability of subprime financing costs marketshare as does the inability to subsidize leases through the captive finance arm. Historically captive finance arms have always been profitable, often times when the manufacturing arm wasn’t.

    • 0 avatar
      Rusted Source

      I’m aware that car loans and mortgages are not the same thing, what I’m getting is the problem of ‘too attractive financing’ and people who are just not able to use enough common sense to say even if it’s a good deal, it’s not a good deal if they can’t afford it. Throw in a sleazy quick-talking salesman and the up-sale from used to new is just a pen stroke or two away.

    • 0 avatar

      You are correct. The difference is that it happens with every car company. You can’t expect that Honda and Toyota are going to turn people down on credit if they can do subprime lending. And they don’t. They are in the subprime business as well.

      There is no reason for GM, Chrysler, Ford, Honda, Toyota, Nissan, etc not to be in this business. It sells cars and they make more money because of it.

    • 0 avatar

      “attractive” financing isn’t available to the credit challenged, they pay for their mistakes with double digit interest rates (as high as 19% in Connecticut where I am), and people will still borrow at those rates. The banks manage their risks by charging higher rates.

      Imagine how different our country would be if a simple home economics class was required in schools. Might have stopped millions of people from making huge mistakes.

    • 0 avatar

      dwford has it right on.

      Just because Santander is going to offer loans doesn’t mean that people walking in with a 600 credit score are going to be getting 0% loans on $30,000 vehicles with no money down.

      Banks that finance the credit challenged generally set caps on the amount of the loan, set a cap for the maximum amount financed (85% seems to be common here, making the buyer take stake in the vehicle by putting some real cold hard cash down), and almost always require documentation that the person can actually pay in the form of tax returns, paystubs, employment history, and references.

      Giving the credit challanged a legitimate way to purchase a vehicle is good both for them and for the dealership. The alternatives aren’t pretty. On one hand you have secondary banks which often charge bank fees, sometimes $2,000 or above, just to buy the loan, which makes the dealership unhappy as they have to cut the gross to make up for it and the customer unhappy as they have to come up with even more money down, and at the same time hit with obscene interest rates, where 15% and above aren’t uncommon. The true last resort is the ‘buy here pay here’ lot, home to the sleaziest of sleazeballs in the industry where someone will loan-shark equivalent interest rates on a beaten up broken down piece of trash car and often get no positive credit out of it as many of those lots don’t even report unless it’s negative.

  • avatar

    I think we need to remind ourselves that lending to subprime borrowers is not what caused the problem.

    Bozos like Angelo Mozilo and his goons at Countrywide (Just as an example) were putting people in expensive $400,000 homes even if they worked as a janitor. They started them off low to entice them in, then since the mortgage was “adjustable rate”, jacked the price up considerably, and when the poor janitor couldn’t afford the payment, Angelo’s goons siezed the house and resold it.

    As for the automakers, they took a bath not on lending but LEASING.

    I don’t think Chrysler is putting itself in a risky position by doing this. People just hear “subprime” and go nuclear, it seems.

    • 0 avatar

      I don’t share your dim view of janitors. Such folks usually have a realist view of the world due to years of living on limited funds.

      Prior generations of Americans had humble means and yet a clear financial sense of what they could afford.

      I do agree that banks that made these loans were irresponsible to the shareholders. Likewise, the rating agencies and subsequent buyers of tainted bundled sub-prime securitized mortgages were equally failing in their duties.

  • avatar

    Is there a difference between non-prime and sub-prime? The article clearly sates non-prime. What is the credit score cutoff?
    Based on Wikipedia:
    “620 being the dividing line between good and bad, 640 or above being “pretty good”, 650 as average general credit-use behavior; 723 being the median FICO score of Americans.”

    Also, why is everyone up at arms over a deal with a foreign (Spanish) bank?

    “Marchionne has leveraged that experience into a non-prime lending deal with a US division of Spain’s Banco Santander”

    • 0 avatar

      The line isn’t entirely cut and dry. 800+ is golden, the score pretty much speaks for itself, you can go to any bank and get the best rates. 700+ is pretty much the same situation, but the banks pay more attention to the number of open auto loans, debt to income, amount owned on credit cards and other revolving lines, and other factors. It’s possible to have a good income and a 740 beacon and still get denied a loan if you already have more than one car loan in your name or you owe a ton of money to people already.

      When you get into the upper 600s range, chances are you are still going to get financed through a primary bank, and you might even qualify for special interest rates like 0% financing, but money down becomes more of an issue, loan to value becomes a very big issue, it gets much harder to roll negative equity into a loan, etc.

      Mid to lower 600s it’s possible to get done, and generally still possible to get done at an interest rate that isn’t awful, but it isn’t going to be a great rate like 5% or below. Money down becomes very important, as most banks aren’t going to front the full 100% of the value of the vehicle.

      This is, of course, all relative. The reason for the lower credit score can be more important than the score itself. It’s almost impossible to get a car loan if you have an open foreclosure or bankruptcy for example. Past repossessions also hurt a lot, and can disqualify you for many years from a particular lender. The lower the score the more important it is to be able to prove your income as well. Waitresses, bartenders, ‘dancers’, self employed persons, consultants, and anyone else who make a large portion of their income in tips or who self-report to the IRS and who haven’t been entirely honest about past income face a tough wall when it looks like their expenses are a bigger draw on their income than they really may be.

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