In July, we learned that General Motors is purchasing AmeriCredit, a major subprime auto lender. At that time, my colleague Megan McArdle wondered what GM would want with a finance company that caters to borrowers with spotty credit histories. I echoed that curiosity, but explained that subprime auto lending isn't as bad as it sounds. In his New York Times column today, Andrew Ross Sorkin suggests an answer: perhaps GM wants to make sure everyone who wants to buy one of its vehicles is able to do so, no matter how bad their credit. He worries that the automaker has purchased AmeriCredit so that it can weaken the lender's underwriting standards and inflate its own sales at a dangerous cost.
Sorkin may, very well, be correct. His logic certainly makes sense. But I really want to believe he is wrong. After speaking at length with GM employees several weeks ago at a Chevy Cruze event, I got the feeling that the company is very serious about creating a "new" GM. Would its management really return to the sorts of questionable strategies that hurt the company in the past?
Sales Won't Be Limited By GM's Future Bankruptcy Risk
But why else might GM purchase AmeriCredit instead of just developing an alliance with the lender? There's one key possibility. By financing its vehicles itself, GM doesn't have to worry about nervous lenders limiting its sales if they are scared of its vehicles due to the company's instability.
If GM were to ultimately fail its vehicles would instantly decline in value. Resale would be difficult, because parts and servicing won't be as easy to come by if the automaker no longer exists. This is particularly significant in subprime borrowing, since repossessions are not uncommon. Resale value matters, so borrowers with less-than-perfect credit might have more trouble getting financing on a GM vehicle than, say, one from Honda. In light of this, it makes sense that GM would want some control over subprime auto lending.
Does this alone make AmeriCredit's loans riskier than they would be otherwise? In a way, since it will have a large concentration of GM loans, which makes its portfolio very vulnerable in a GM bankruptcy. But, well, if GM fails, then AmeriCredit's fate is hardly of much concern to GM. Since the automaker would own AmeriCredit, the captive finance company doesn't really need to worry about how a bankruptcy would affect the value of GM vehicles -- its health would be tied to its parent anyway. If you're going to fail, you might as well fail spectacularly.
Financing A Larger Portion of GM Customers
Or perhaps the automaker's reasoning is even simpler. Maybe it simply wants to be able to capture more of the lucrative financing in the market. AmeriCredit provides that.
Owning any captive auto unit would allow GM to reap profit on prime borrowers -- that's the easy part. But with AmeriCredit, it can capture even more of the financing, up to virtually every borrower that wants a vehicle and could obtain financing in the market. The automaker will now be able to collect more loan fees and interest in its net than the other captive finance companies can -- even without watering down AmeriCredit's underwriting requirements.
Think about the average GM customer. Their cars don't cater to a luxury audience. It wouldn't make sense for Mercedes, for example, to own a subprime mortgage lender. If you've got poor credit, then no one is going to give you loan on a $50,000 automobile. But for a $17,000 Chevy Cruze with the borrower putting 20% down? GM can now take the loan if the numbers work out for such customers with less-than-perfect credit. Having the capacity to write subprime loans captures a much greater portion of financing from GM's clientele.
So GM's strategy here could be two-fold. First, it wants to make sure its customers can get financing just as easily as they can on the vehicle of any other automaker. Second, it wants to capture the financing profits of more of its customers. Whether or not the automaker also intends to extend credit too far, as Sorkin predicts, however, is yet to be seen. But let's hope GM won't resort to such a gimmick and has more honorable intensions for its new acquisition.
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