GM Financial To Compete With Ally For Floorplans, Increase Number Of Junk Loans
“I want to compete with Ally, but I don’t want to be head-to-head,” Akerson said in a recent interview. “I want to be there when they’re not in a market, but I want them to know I can come in at any time.
With the above statement, which was clearly inspired by the chorus from Billy Idol’s “Flesh For Fantasy”, the bullet-headed madman at General Motors’ rickety helm has launched a new offensive. “GM Financial”, formerly known as the subprime lender “AmeriCredit”, has just sold $500 million worth of bonds with one objective in mind: the occasionally lucrative, and just as occasionally disastrous, dealer floorplan market.
As most TTAC readers surely know, the average dealership does not own any of the cars on its lot. Rather, they are financed through a revolving-credit scheme known as the “floorplan”. The bank buys cars from the manufacturer then receives payoffs when those vehicles are sold. Leaving cars which have already been sold “on the books” is one of those tired-but-superbly-profitable-in-the-short-term criminal schemes which pops up with depressing regularity in books, (Rabbit At Rest), movies (“Fargo”), and real life.
A more likely source of financial heartache for floorplanning banks, however, particularly in the modern era, is a dealership closure. When dealers fail, it takes a while to sell their floorplanned inventory to another dealer, and losses are part of the picture. When your humble author worked for Ford Credit nearly two decades ago, dealer failures were rarer than hen’s teeth. Today, they are as common as goose poop.
No wonder, then, that “GM Financial” wants to get involved in the business. The Detroit News reports that, under the direction of Dan Akerson, the company will compete directly (but not, apparently, “head-to-head”) with Ally Financial (formerly known as GMAC, and 9.9 percent owned by GM) for dealership floorplan business. Why they would do this is anybody’s guess.
Don’t worry, though: GM Financial is still working to shove subprime customers into GM vehicles.
“We were losing sales because we couldn’t provide the marketing,” Akerson said. “(Ally was) in the neighborhood, but they weren’t as aggressive and they weren’t where they needed to be.”
GM’s subprime lending in the first quarter slightly exceeded the industry average — 6.1 percent to 5.4 percent for the industry — but its leasing is moving closer to the industry average. First quarter GM leasing was 16.8 percent, compared to 23 percent for the industry, GM said…
GM Financial, he said, is being smart in boosting sub-prime lending. “We’re not taking bad credit risks,” Akerson said.
As Fargo’s Jerry Lundegaard would say, “Oh, You betcha.”
More by Jack Baruth
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Every other car maker has a substantial in house finance arm, and the vast majority of the time those operations are nicely profitable. GM cannot compete without a strong in house finance arm. Dealership closings in the here and now are once again fairly rare, and floor plan financing can be a very profitable business. GM would be remiss not to get back into this in a serious way. The funny thing is, GM under Sloan pretty much invented the car loan, floor planning and the in house finance/credit division. Henry Ford fought car loans for a long time, but eventually had to relent under competitive pressure from GM.
Subprime isn't necessarily analogous to a bad loan. The biggest problem with subprime, as it was associated with the mortgage biz, wasn't that it was aimed at borrowers with shaky credit - it was that too many subprime outfits lent to these shaky borrowers WITH NO VERIFICATION OF INCOME AND ASSETS, and then to make matters worse, these folks were allowed to take out riskier mortgages (i.e., interest-onlys, negative amortization, ARMS, etc). That was the crux of the problem. Just because someone has a bad credit score doesn't mean he or she won't pay the mortgage. If the lending process involves a holistic review of the borrower - i.e., doesn't just consist of some clerk who approves everything with a FICO greater than a certain number - then even riskier buyers can be financed with acceptable risk. Given this economy, there's probably a huge pent up demand for new (or new-ish) cars from people who have been hit by the hard times. These folks might not necessarily fit the standard mold a lender would want, but they shouldn't be dismissed out of hand. Many are actually looking to re-establish themselves. The question is whether lenders will dig deeper into these borrowers' finances and make a balanced decision.