Low-Cost Vehicles Could Force Changes to Financing Process

Back when I was in high school, I had a job at a retail store. I worked there for a number of years, and this being the early 1990s, department store credit cards were becoming more popular. My store introduced one (it was the first credit card I ever applied for, and received. Who would give a 17-year-old with no credit history and a part-time job a $2,500 credit limit today?). It was our job as clerks to try and persuade customers to apply. It didn’t matter what the customers were buying, we were required to ask them if they wanted to apply for a store credit card. It only took 30 minutes to receive an answer, via fax machine. I can remember how silly it sounded when someone came in to buy batteries or a picture frame and we asked if they wanted to pay for it with a new credit card they could apply for right now.

An article I read yesterday about Nissan rolling out the lowest-priced car in the world reminded me of that stage in my life as a salesman. The new model, under the revived Datsun label, will cost in the neighborhood of $3,000. The car is intended to be sold in emerging markets and isn’t likely to make a trip to the United States, but the decision to offer a bare-bones car at a bare-bones price did make me wonder how it would affect the auto finance market should it make an appearance in North America. Would people still be as likely to finance a $3,000 vehicle as they would a $20,000 one?

The most likely comparison would come from people who buy used cars at that price point, and in most cases, dealers are very reluctant to offer financing on vehicles in that range. Conventional thinking is that such a low price point makes it easier for a borrower to walk away from a vehicle should the payments become too onerous.

With a new car, the dynamic might be slightly different. It’s likely that fewer people would finance a vehicle at that price point.

Other carmakers are expected to follow Nissan’s lead. Volkswagen, for example, is working on a low-cost vehicle, as well, according to the Wall Street Journal. If Nissan is successful with its new Datsun model — which is expected to hit the streets in 2014, you can expect other carmakers to jump on board quickly. Once that train pulls out of the station, it is likely that manufacturers will target the United States with lower-cost models, too.

For financiers, a $3,000 vehicle would be like financing the purchase of a new furnace or a pool table. The credit approval and underwriting processes could be streamlined, and the paperwork would be a lot less, too. Would financiers have to revamp their process or develop a second, streamlined process just for lower cost vehicles? Developing a second set of instructions could be costly for finance companies.

For financiers, the hope is likely that the low-cost car does not become the picture frame equivalent for the automotive industry.

Back when I was in high school, I had a job at a retail store. I worked there for a number of years, and this being the early 1990s, department store credit cards were becoming more popular. My store introduced one (it was the first credit card I ever applied for, and received. Who would give a 17-year-old with no credit history and a part-time job a $2,500 credit limit today?). It was our job as clerks to try and persuade customers to apply. It didn’t matter what the customers were buying, we were required to ask them if they wanted to apply for a store credit card. It only took 30 minutes to receive an answer, via fax machine. I can remember how silly it sounded when someone came in to buy batteries or a picture frame and we asked if they wanted to pay for it with a new credit card they could apply for right now.

An article I read yesterday about Nissan rolling out the lowest-priced car in the world reminded me of that stage in my life as a salesman. The new model, under the revived Datsun label, will cost in the neighborhood of $3,000. The car is intended to be sold in emerging markets and isn’t likely to make a trip to the United States, but the decision to offer a bare-bones car at a bare-bones price did make me wonder how it would affect the auto finance market should it make an appearance in North America. Would people still be as likely to finance a $3,000 vehicle as they would a $20,000 one?

The most likely comparison would come from people who buy used cars at that price point, and in most cases, dealers are very reluctant to offer financing on vehicles in that range. Conventional thinking is that such a low price point makes it easier for a borrower to walk away from a vehicle should the payments become too onerous.

With a new car, the dynamic might be slightly different. It’s likely that fewer people would finance a vehicle at that price point.

Other carmakers are expected to follow Nissan’s lead. Volkswagen, for example, is working on a low-cost vehicle, as well, according to the Wall Street Journal. If Nissan is successful with its new Datsun model — which is expected to hit the streets in 2014, you can expect other carmakers to jump on board quickly. Once that train pulls out of the station, it is likely that manufacturers will target the United States with lower-cost models, too.

For financiers, a $3,000 vehicle would be like financing the purchase of a new furnace or a pool table. The credit approval and underwriting processes could be streamlined, and the paperwork would be a lot less, too. Would financiers have to revamp their process or develop a second, streamlined process just for lower cost vehicles? Developing a second set of instructions could be costly for finance companies.

For financiers, the hope is likely that the low-cost car does not become the picture frame equivalent for the automotive industry.