Subprime lenders finance smaller share of CarMax sales

In the three months ending May 31, CarMax Finance originated a total of $20.5 million of loans under its subprime test program, representing 0.8 percent of its retail unit sales.

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The percentage of CarMax Inc. vehicles purchased with loans from subprime lenders declined to 16.1 percent in the company’s fiscal quarter ending May 31, from 21.3 percent a year earlier, the nation’s largest used-vehicle retailer said.

That includes vehicles financed under a test program started in January by CarMax’s captive finance arm to learn more about financing customers it typically would have handed off to a subprime lender.

In the three months ending May 31, CarMax Finance originated a total of $20.5 million of loans under its subprime test program, representing 0.8 percent of its retail unit sales.

CFO Tom Reedy said CarMax’s percentage of subprime loans is tied to a combination of factors, including actions by its partner lenders.

Prime lenders taking more

For example, he said, in the latest fiscal quarter, CarMax saw a lift in sales that were funded by what he called its tier 2 lending partners, lenders who specialize in nonprime loans, indicating they picked up some customers they would have declined in the past.

CarMax defines tier 2 lenders as those who specialize in loans to customers with nonprime credit and tier 3 lenders as those who specialize in loans to customers with subprime credit.

“So tier 3 behavior is going to be a combination of what’s coming through the door and what makes it down to them, and finally their behavior and their credit appetite,” Reedy said during CarMax’s quarterly earnings conference call this month.

Added CEO Tom Folliard: “I would expect over time those things are going to be constantly moving as lenders continue to tweak their scorecard and make adjustments based on the performance of the portfolio that they have originated.”

The company also saw an increase in the number of consumers who purchased vehicles with funds from sources outside of CarMax’s system, such as credit unions and cash purchases, Folliard said.

Profits up

The company said income before taxes but after interest expenses for CarMax Auto Finance, its captive finance arm, increased 9 percent to $94.6 million as a result of an increase in average managed receivables, partly offset by a lower total interest margin.

The total interest margin, which reflects the spread between interest and fees charged to consumers and the captive finance arm’s funding costs, declined to 6.7 percent of average managed receivables in the quarter from 7.2 percent in the same quarter last year.

In the quarter, CarMax’s overall net earnings rose 16 percent to $169.7 million, on higher retail and wholesale unit sales and income from its captive finance unit.

Revenues at the nation’s largest used-vehicle retailer increased 13 percent to $3.75 billion.

CarMax’s retail used-vehicle sales grew 10 percent to 150,528 units. Wholesale unit sales also grew 10 percent, to 97,098. New-vehicle sales jumped 33 percent to 2,597.

The average retail selling price of a CarMax used vehicle climbed 3 percent in the quarter to $20,173, marking the first time it had exceeded $20,000.

You can reach Arlena Sawyers at asawyers@crain.com.

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