Auto loan car finance

Zero-percent financing from automakers and rising interest rates are forcing bankers to either aggressively pursue more car loans or simply back away.

Faced with competition from automobile manufacturers, credit unions and non-prime lenders, some banks are pulling back from indirect lending as rising interest rates further squeeze profit margins.

"I don't think you'll see us as a significant player in that market in Louisiana for the next several years," says Danny Montelaro, president of the central Louisiana market for Regions Bank.

Cheap financing from "captives"--the financing divisions of companies like General Motors and Ford Motor Co.--has been a serious challenge to banks since the 1980s, says Fritz Elmendorf of the Consumer Bankers Association. The same goes for cash rebates that carmakers use to "move metal" off dealer lots to spur sales.

A decade ago, perhaps 50% of buyers opted for direct financing from General Motors Acceptance Corp., says Craig Azar, sales manager for the Gerry Lane GM dealerships.

"Now it's about 70%," Azar says.

The snowball effect of years of that cheap financing from car companies is making indirect lending less appealing for all but the biggest players. As with credit cards, auto lending is becoming a business where scale matters.

"To be in the business, you either need to be big or not be in it," says Tom Kelly, a spokesman for Bank One Chase, the biggest "non-captive" auto lender in the nation. "There's been a lot of consolidation."

Captives look to land new-car buyers with the best credit. Late last year, GMAC and other captives increased rebates on some models by as much as $1,000 to buyers who agreed to finance with them, says Gary Perdue, who oversees indirect lending for Hibernia National Bank.

"Even if you wanted to pay cash, you couldn't get the extra $1,000," Perdue says. "And who wants to pay an extra $1,000 for a car?"

The bank does about 45,000 new- and used-car loans a year in Louisiana. Indirect lending accounts for about 10% of Hibernia's earnings, Perdue says. Over the past few months, Hibernia has lost its place as the leading indirect lender in Louisiana, not only because of the fall campaign by the captives, but also because higher interest rates have prompted consumers to hold back a little on buying, he says.

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GMAC is now the biggest new-car lender in the state, with Ford's new-car financing division and Hibernia's combined new-and-used lending running neck-and-neck for second place, Perdue says.

Nationally, stepped-up indirect lending by credit unions and an expanded role by non-prime auto lenders are adding to the pressure, says Ted Brown, a consultant for Benchmark International in Atlanta. He also notes that rising interest rates cut into profits because banks can't stay competitive if they raise consumer rates to keep pace with the prime rate.

Consumer rates now are in the 6%-to-7.25% range, compared to 4.75% to 5.75% a year ago, Perdue says. That's good news for car buyers but shrinks lender profits.

Banks are responding with several tacks, including more aggressive lending, according to a 2004 report by the Federal Deposit Insurance Corp. That could leave them vulnerable to bad loans if interest rates continue to climb or the nation's economy stumbles, the report says.

Bankers here insist they aren't loosening lending standards. But there is a demand for financing from people who have had past credit problems.

Hibernia works with certain car dealers to craft loans that make sense to all parties, says Perdue. This month Hibernia launched a program of less-than-prime car loans that it resells to another bank for servicing. The idea is to give dealers more choices to offer people with imperfect credit, he says.

Another move by banks is using technology to speed a lending process that typically begins at the dealership. Hibernia is investing in "electronic contracting" technology that allows buyers to sign an electronic signature pad at the dealership. Electronic transmission of data means manual data entry is no longer needed, speeding up the transaction on Hibernia's end, Perdue says.

To be a significant player, a lender has to make a big commitment to making loans through dealerships, several bankers said. Dealers typically have a short list of lenders they call when exploring funding options with potential buyers, says Regions Bank's Montelaro. The lender at the top of that list typically gets a shot at the best loan prospects.

"If you are third on the list, you just have a tough time getting any of the cream puffs," he says. "You end up getting a lot of the dogs."

For Regions, car loans haven't been a big priority for years. Indirect loans for automobiles account for a "miniscule" part of the bank's consumer loan portfolio, perhaps less than 5%, Montelaro says. That's unlikely to change in the foreseeable future, he adds.

Bank One Chase and Hibernia both say car lending will continue to be a priority.

"More banks are getting out of the business," says Hibernia's Perdue. "But this is an important focus for us."

SARA BONGIORNI covers economic development, banking and personal finance. Reach her at shongiomi@businessreport.com.