Ford Credit bucks shift to longer, riskier loans

Ford Credit says it will keep providing Ford Motor Co. steady subprime support, but it's shying away from expanding those deals or offering longer loans -- a strategy rivals, including General Motors, appear to be pursuing.

Michael Seneski, CFO of Ford Motor Credit Co., said at a conference for analysts and investors this month that Ford Credit finances three out of four Ford customers who have a credit score below 620.

"We're maintaining a very consistent presence in that subprime market," he said in a presentation at the Citi 2012 North American Credit Conference in New York.

However, he said, neither Ford Credit nor its parent company is looking to greatly increase subprime business.

Seneski said Ford Credit considers about 5 to 6 percent of its contracts to be "high risk" based on its own proprietary scoring system. But when asked later, the lender wouldn't say precisely what its sales penetration for subprime is or how it defines subprime.

By contrast, GM said during its earnings presentation last month that 8.1 percent of its sales in the third quarter were subprime, up from 6.7 percent a year earlier. According to GM, the industry average penetration for subprime in the third quarter was 5.7 percent, not counting GM, up from 5.2 percent a year ago. GM defined subprime as customers with a credit score below 620.

In 2010 GM bought subprime specialist AmeriCredit Corp., now GM Financial, partly so its dealers would have a go-to source for subprime loans.

Conservative approach

Ford Credit's Seneski also said at the investor conference that the captive is taking a relatively conservative approach to longer-term loans. He said the lender's share of 72-month loans is around industry average; however, Ford Credit doesn't plan to join industry growth in 84-month loans.

"Truthfully," he said, "our job is to get the customers back in those cars and trucks. And putting them in an 84-month mortgage in a car doesn't really seem consistent with our strategic direction."

Others, though, appear to be embracing longer loans. Experian Automotive data show that in the third quarter, auto loans in a range from 73 to 84 months -- made up mostly of 84-month loans -- grew to 12.8 percent of loans, up from 10.3 percent a year earlier. Loans from 61 to 72 months -- made up mostly of 72-month loans -- accounted for 39.5 percent of loans, up from 37.9 percent a year ago.

Melinda Zabritski, Experian Automotive's director of automotive lending, said last week the upside to longer-term loans is that customers achieve a lower monthly payment. The downside is that customers with longer loans are often ready to trade long before the loan is paid off. That makes them more likely to be upside down when they want to make their next purchase -- that is, owing more on the trade-in than the car is worth.

That can create unhappy customers a couple of ways. Rolling negative equity into the next loan adds to the cost of the next vehicle, assuming the customer can get approved for a bigger loan. If that's impossible, the customer could get stuck in their current vehicle longer than either the customer or the manufacturer would like.