Subprime Demand on the Rise, but Supply is Still Slacking

canstockphoto3714752Strict standards for credit quality and shorter loan terms for available financing in the powersports industry have left dealers looking for more subprime finance providers.

“The supply hasn’t caught up with the demand yet,” Chris Rice, regional operations manager at Ridenow Powersports, said. “We don’t have enough interest from the finance community, possibly because the risk is higher than it used to be [pre-recession] before things collapsed.”

Rice’s dealership has seen an increased interest from applicants in the subprime space in recent years, he said. It’s “fairly easy” to get five out of 10 applicants approved for financing, he said, but approval does not always translate to a finalized deal.

“We probably only get one or two of those five put together. [It’s due to] high-rate, short-term, higher-percentage down,” he said. Shorter terms spike payments, Rice said. Currently, the loan terms at Ridenow range between 24 and 36 months. Lengthening the terms by a year would help to have more customers approved, Rice added.

Joe Becerra, finance director at F&T Valley Motorsports, agreed. “On average, I see 30% down-payment requirement for motorcycles, plus terms in the 45-month range,” Becerra told Powersports Finance. “That’s not a true subprime program. Another year [in term] would definitely help.”

Customers finance more than 95% of Pharr, Texas-based F&T’s deals today, up from 70% from a few years ago, he said. With the increase in the overall loan volume, subprime consumers have also increased at the dealership.

“As far as applicants, we have many, but only about 20% of them get approved, but even if they get approved, only about 10% are able to sign up, due to strict terms.”

– Joe Becerra, Finance Director, F&T Valley Motorsports

At North Tonawanda, N.Y.-based Bob Weaver Motorsports and Marine, about half of the subprime customers approved by banks actually sign up for the loan, Mike Weaver, general manager, told Powersports Finance. “We are on the lookout for more subprime finance providers to offer doable terms,” he said. “There is only one bank that we work with that actually focuses on subprime.” In the past couple years, subprime comprised 30% to 40% of the dealership’s customer base, Weaver said.

The inflexibility of the terms for subprime lending is one of the reasons that many dealers do not get into the space at all, F&T’s Becerra said. “Some of the dealers don’t understand the program, or a lot of times they have high acquisition fees [for consumers],” he explained. “In our store, we’ll pay the fee, because we can replace the motorcycle but not the buyer.”

Offering discount fees is another way dealers assist customers in getting the loan, Matt Lekawa, senior client development manager at Capital One, told Powersports Finance. “Dealers love having at least an option to put together a deal, but also a majority of them don’t have designated F&I officers, they just use what OEMs offer,” he said.

There are not many nationally supported subprime programs, Lekawa said, as the margins in powersports financing are much slimmer than those in auto, for example. “Even if the economy is doing good, and people finance more recreational vehicles, the reality is bigger players plan for long-term decisions, they are not into making short-term investments,” he said. “In the economic cool-down time, I might still think that I don’t need that sports bike or will I really use that ATV as much as I think.”

With national lenders out of the picture, Lekawa added, smaller players and new entrants can still carve out a “relatively decent chunk” in subprime powersports financing, as the demand among dealers and consumers is on the rise, Lekawa added. “There are local players that are doing well, as they have the recoverability and expertise in their regions,” he said.

“The interest to enter the space has definitely peaked recently, especially after CapOne’s exit a lot of players are wondering if the water is warm.”

– Matt Lekawa, Senior Client Development Manager, Capital One

Reno, Nev.-based FreedomRoad Financial is one lender that is still testing the subprime waters. The company reported record 35% year-over-year growth in 2015, and currently partners with 1,500 franchised dealerships as a full-spectrum lender. “The industry doesn’t do enough used and subprime financing,” Tom Collins, executive vice president and managing director, told Powersports Finance previously. “Our overarching goal is to look deeper into that space and see what we can do to help more customers get approved.”

This story originally appeared in the inaugural Powersports Finance Quarterly. To get access this issue, subscribe here.

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