SAN DIEGO — Consumer Portfolio Services is increasing contract prices to dealer partners “a couple of bucks” to preserve cost of funds in advance of a looming downturn, Executive Vice President and Chief Financial Officer Jeffrey Fritz said at the Auto Finance Risk Summit this month.
“If my margins are getting squeezed because the cost of funds is going up 25 or 50 basis points, I can [pass along the cost] to the dealer by having them pay $100 more for contracts,” Fritz said. “We can charge the dealer more because the contract is on the low end of the credit spectrum.”
Bumping up contract prices is a way to reduce the spread between a lender’s cost of funds and the interest rate charged to consumers, which is one of the primary sources of profit for financial institutions. However, raising dealer contract fees is a “lever that comes with some pushback,” Fritz said, because the practice could put CPS at a disadvantage in today’s competitive auto finance market.
A second strategy lenders can implement to protect cost of funds is to increase auto loan interest rates for consumers. But that strategy is challenging, Fritz said, especially for subprime lenders.
“In our case, we are operating in a certain portion of the credit spectrum,” he said. “I can raise the rates of the customers on the low end of the spectrum, but you have to be cognizant of the rate caps.” CPS had a $2.4 billion auto loan portfolio at yearend 2018, according to Big Wheels Auto Finance Data 2019.