Car Financing for Low and Moderate Income Consumers
For the purposes of this paper we are defining the LMI universe as consumers with a credit rating of D and below (typically characterized as sub-prime) and generally those with an income below $40,000. Credit scores appear to be a valid marker for defining ‘LMI’ consumers.
Each year, over 100 billion dollars in car loans are made to LMI consumers. Assuming an average loan of $12,000, over eight million low and moderate-income consumers receive auto loans. Eight million is a very conservative number. The number of consumers in all likelihood is at least twice as high, over sixteen million, and this larger number encompasses those with the greatest need. For instance, the eight million figure includes only those consumers with a valid social security number and a credit score. In one sample, about 40% of consumers who approached Working Wheels did not have credit scores. (Their average income was $14,000 per year. (See Figure 1.) The eight million figure also does not include “Buy Here/Pay Here” consumers, which probably numbers in the millions and perhaps represent a minimum $5 billion market annually.
Additionally, the eight million number does not include consumers with incomes over $40,000. In many definitions, ‘low and moderate income’ could include families in many parts of the country with incomes over $50,000 per year.
Whatever the number, these consumers generally reside in the sub-prime credit categories, and probably 95% at best have no access (or don’t know they have access) to credit other than by using unnecessarily expensive sub-prime lending sources, or worse, by using Buy Here/Pay Here schemes. BHPH is one of the fastest growing areas of subprime lending and now involves new car dealer franchises at times in partnership with all types of lending pools.