Dealers urge lender flexibility in aftermarket financing

Dealers are urging lenders to loosen the loan-to-value restrictions on aftermarket products such as service contracts and guaranteed asset protection coverage. "Nobody in the lending side wants to see a 150% LTV,” Jay Slingerland , vice president of Corunna, Mich.-based Slingerland Chrysler Dodge Jeep Ram Fiat , told Auto Finance News . Slingerland noted that it would be helpful for lenders to set specific LTV guidelines for vehicle purchases and a dollar amount allowance for add-on products such as service contracts or GAP. What’s driving the call for the easing of guidelines is that many buyers have shifted to less expensive vehicles , which puts pressure on loan-to-value ratios (LTV), S lingerland said . As an example, a $14,000 car could carry an LTV of between 115% and 125%, Slingerland said. If an aftermarket service contract costs $3,500, that would push past many lenders’ thresholds, especially with taxes and other fees added, he said. "Those are two specific areas that protect the lender directly, and in many cases are refundable products to the customer if they sell or that car gets totaled, ” he said. Negative equity adds to woes Negative equity in trade-ins is pushing LTVs higher in the used-vehicle market. Nearly 1 in 5 vehicle trade-ins include negative equity of $10,000 or more, according to an Oct. 15 Edmunds report. In the third quarter, 24.2% of trade-ins for new- vehicle purchases had negative equity, up from 18.5% a year earlier, according to the report. The average amount owed on upside-down auto loans hit a record $6,458, up from $5,808 in Q3 2023. The share of used vehicles with an LTV of 120% or more was 54% last quarter, up 800 basis points from last year, and more than double from Q3 2021, when it was 25%, according to TransUnion . “The trend continues to be elevated LTVs [of] around 120%,” Satyan Merchant, senior vice president of automotive and mortgage at TransUnion, told AFN . “We saw a bit of a jump up year over year. There were some loan vintages of high LTV in the used segment that ended up performing worse than expected. It's an area for lenders to be cautious on in terms of how far they're stretching the loan.” Despite the stretched LTV environment, service contracts can be the difference between a customer keeping the car or opting for a new one, Slingerland said. “When customers come in the door, they're buying a new vehicle because they don't have money to replace their tires. They don't have the funds to pay for a repair that their current vehicle may need,” he said. “If things are that tight, by not allowing a service contract or other products on the back end, that's going to create a bigger issue for lenders. The old saying is still true today, ‘If the car is not running, the customer's not paying.’” " If the car is not running, the customer's not paying.” -- Jay Slingerland, Slingerland Chrysler Dodge Jeep Ram Fiat Al Salas , chief executive of Tewksbury, Mass.-based new and used EV retailer Eco Auto Group , told AFN that he is unsure what the risk is for a lender to provide too large of an advance for ancillary products. “From my perspective, [the answer] is zero,” he said. “If it's a cancelable product that's relatable back to the customer and it gives them additional value and peace of mind to keep that vehicle on the road longer, wouldn't that align with the [lender’s] goal, which is to keep them in the car, paying their bill?” Dealers sense a shift from lenders Dealers have noticed that lenders understand dealers need more support in aftermarket product financing. Tampa, Fla.-based Morgan Auto Group has seen a shift in lenders' approach to aftermarket products, said Justin Buzzell , vice president of financial services. Previously, some lenders offered only a few add-on products for financing , but in some cases, the dealership includes as many as 12 products on its menu, Buzzell said. Lenders are reevaluating back-end allowances, including the distinction between non-cancel l able and cancelable products, he said. “More lenders are looking at cancelable backend as benefits, rather than something that would hold you back,” Buzzell said. “They know that in most cases, if they lend for specific value-added products that the customer is likely to use said products, and if they use them, they'll keep their car on the road and make their payments.”

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