Filling the gap: Where are all the side-by-side repos?

As the U.S. motorcycle market continues to feel a sales pinch, the side-by-side has risen to fill the gap as one of the most popular powersports vehicles. It’s the fastest growing vehicle segment, with OEMs such as BRP and Polaris reporting sales growth every quarter as they release increasingly innovative updates. Lenders aren’t slacking either as companies such as ThunderRoad Financial move to meet the growing demand for side-by-side loans.

However, while more side-by-sides are being sold and financed, there seems to be a lack of UTVs organically hitting the secondary market.

“What we are not seeing on the back end, which we would expect to see, is … a rise in the number of vehicles that are coming through the secondary channel,” Tony Altieri, business development manager of National Powersport Auctions told Powersports Finance. “The ratio of side-by-sides that we’ve been selling [at auction] hasn’t really increased very much over the last 10 years, even though we’ve been, as an industry, selling and financing more. The dealers aren’t seeing more used side-by-sides coming back through their doors, so we continue to sell more new vehicles.”

To better understand this, PSF spoke with three industry professionals who offered their perspectives as to why used side-by-sides aren’t arriving in the secondary market, despite their popularity.

Side-by-side sales growing step-by-step

Side-by-sides began gaining traction in the market three years ago and their popularity has since continued to rise. BRP side-by-side sales rose 30% year over year during the third quarter, which contributed to the OEM’s U.S. sales rising 24% YoY, the company reported last year.

The vehicles appeal to multiple types of consumers, as they can be used for recreational and industrial purposes. Additionally, there are “[fewer] barriers to entry in terms of licensing requirements,” Altieri said. “In some states, you don’t have to get a vehicle titled or registered because it’s an off-road vehicle. So, there are some hurdles for a retail consumer to be able to get into a motorcycle that doesn’t exist in the side-by-side market.”

Another contributing factor to the overall growth is that, from a margin perspective, dealers and OEMs have more incentive to push and sell these vehicles. The average price range on a UTV is typically $10,000 to $20,000, so dealers and OEMs receive a larger margin of profit than they do with motorcycles, despite the fact it takes more energy to manufacture, move, store and sell them, Altieri added.

While the new side of the UTV business is growing, the used side appears to be moving at a slower pace. On average, NPA has sold  80,000 to 90,000 powersports vehicles per year since 2010. The peak number of side-by-sides sold in one year was 4,100, just 6% of the company’s overall inventory.

The bulk of NPA’s used side-by-side inventory comes from de-fleets from rental agencies, as opposed to dealer consignments or repossessions from lenders. While there isn’t necessarily a lack of used side-by-sides, they aren’t coming from typical sources at a frequent pace.

Prime credit leads the pack 

One possible explanation for why lenders aren’t repossessing more side-by-sides is that the credit quality of the borrower leans more heavily on prime, who are seen as a safer risk than a subprime borrower. Though there is a growing number of nonprime customers seeking loans for these vehicles, the scale is still weighted toward prime.

At ThunderRoad Financial, 80% of its side-by-side loans are to prime consumers. As such, the lender has not seen an increase in repossessions because prime borrowers do not default as often as subprime consumers.

“We make sure the risk is priced accordingly,” Chief Operating Officer Kristi Mercier said. “Your 540-credit score probably isn’t going to be our specialty at that level. And, usually, if your prime buyers going to default, they’re going to call you and say, ‘Hey, I’m in a situation and I have to choose between my car or my bike and my [Polaris] RZR.’ In powersports, it is a luxury item.”

Another possible reason for fewer side-by-sides in the secondary market is that the growth in vehicle sales is still relatively recent. Reno, Nev.-based ThunderRoad Financial has been lending side-by-side for about two and a half years, spurred by dealer demand, so those initial loans may not have completed their terms.

“We don’t see a whole lot on the trade-in cycle because [the vehicles are] not old enough yet,” Mercier said. “Usual trade-in cycle is between 30 to 36 months. Well, if you look back, some of the RZRs have only been around just a few years, so maybe they haven’t made it into that trade-in cycle for the newest model.”

With the terms nearing an end, it’s likely that more side-by-sides will begin to arrive in the secondary market.

The cost of repossessions

While it’s likely that repossessions for side-by-sides are not a frequent occurrence for lenders, there is a possibility that lenders are choosing to charge-off the loan rather than go through the expense of repossession.

On average, repossessions on powersports vehicles are more expensive than other vehicle asset types at Primeritus Financial Services, a recovery management company that handles automobiles and powersports, Vice President of Business Development Jessica Rosselli told PSF.

“The cost is going to vary based on a couple of factors,” Rosselli said. “Powersports, in general, are a bit higher of a recovery fee, and that’s going to be based on not only the location [of the recovery], but what agents we’re utilizing as well.”

For instance, the rate might be higher if the vehicle is located in a mountain region compared with a suburban area. Primeritus has not seen a significant change to its side-by-side repo rate since vehicle sales began to rise.

If lenders are opting to avoid the repo expense, then the consequences are that “charge-off rates get higher, it’s going to make folks either stop lending or choose to increase rates when, if we just treated [side-by-sides] like we would a car or a motorcycle, the performance would be as good or better on the back end,” NPA’s Altieri said.

However, Rosselli finds it unlikely that lenders would take the charge-off because the balance on the vehicles is typically higher.

“In general, side-by-sides are a higher balanced powersport unit,” Rosselli said. “They would want to recover them and not have a charge-off that was full balance with collateral attached to it. The recovery is more costly than an automobile, however, it still justifies recovering. I would assume that most of these vehicles are probably around $20,000 to $30,000 balances, especially if there is new inventory rolling through.”

To 2020 and beyond

While side-by-sides may not be hitting the secondary market in large waves, it’s a market that seems poised to grow. As sales at OEMs continue to grow and consumers become more interested in the vehicles, 2020 may be the year to keep an eye on the used side-by-side market.