“Keeping Them Sold” in Subprime Auto Finance – Part 3

Posted 5 years ago

By Kenneth Shilson

President, Subprime Analytics


In my initial two articles in this five-part series, I mentioned that auto bond securitizations have fueled the high level of subprime auto finance competition during the last 3 years.  I indicated that the business models used in these securitizations differed from those used by the independents that we surveyed in the benchmarks during the same period, as follows:


Business Model Comparison

2017 Deep Subprime per Experian

2017 Independent BHPH Benchmarks







Amount Financed





Used Loan Term

55 Months

44 Months

11 Months


Used Monthly Payment





Average Finance Rate






            Understanding the differences in underwriting and their impact on collections and recoveries, risk management, and cash flow are the subjects for these articles.  In this article (Part 3) I will discuss how underwriting differences impacted collections and recoveries.

Although the deep subprime auto bond securitization model often started with new or CPO vehicles, the independents have historically sold and financed similar credit score customers with much older vehicles over shorter terms.  Wall Street convinced investors that newer and higher ACV vehicles helps to guarantee repayment and minimize default losses.  I have personally analyzed more than 2 million subprime finance contracts which aggregate over $20 billion.  In my opinion, a newer, higher-cost vehicle does not assure repayment and typically results in a larger charge-off, if and when the deep subprime customer defaults.  The vehicles that are sold look very different after they default!  In many instances, they are unrecognizable due to their poor condition and damage.  In order to finance these higher cost vehicles, the auto bond contract terms were extended to 5-7 years.  This increased the likelihood of default and lowered the realized return on investment.

Due to the highly competitive subprime market over the last few years, operators also reduced down payments to increase market penetration.  My portfolio analysis indicates that lowering down payments while increasing vehicle costs often creates an economically unsustainable business model because it dramatically increases cash in deal (CID) and lender risk!  Therefore, that strategy is not a recipe for success.

Operators frequently evaluate their performance based upon the number of vehicles they sell each month.  At Subprime Analytics, we measure success by “Keeping Them Sold” and keeping customers paying over the entire term of the contract.  In comparing our independent subprime benchmarks trends from 2014-2017, we compiled the following metrics in the table below:

Selling Vehicles
Description 2014 2015 2016 2017 % Change
Average Sales Price $11,600 $11,874 $11,729 $12,752 10%
Average Amount Financed $10,765 $11,090 $11,015 $11,951 11%
Average Monthly Payment $386 $386 $381 $390 1%
Average Original Term (Months) 40 42 43 44

We then analyzed how each vintage above performed and the results are shown in the table below:

Keeping Them Sold
Description 2014 2015 2016 2017
Highest Default Month After Origination 18th  21st  22nd  22nd 
$ Collected Through Default (Including Interest) $6,942 $8,099 $8,387 $8,580
$ Deficiency @ Default $6,727 $5,966 $5,890 $7,037
Average Default Rate 31.2% 31.5% 34.0% 35.0%
% Change In Collections    From Prior Year (3%) 17% 4% 2%
% Change In Charge Offs   From Prior Year (1%) (11%) (1%) 19%

When we compared the dollars collected through the average default month versus the dollars written off at average default, it is apparent that the risk versus rewards of longer terms and higher ACV is not justified when you consider the higher default rate.  The 2017 metrics indicate that a 2% increase in amounts collected is more than offset by a 19% increase in average charge-offs.  Although more “paper profits” are initially reported in the financial statements using higher sales prices, these metrics show they don’t convert into more actual profit due to increase in defaults.


My question to you is simple – are you in business to sell more vehicles or to “keep them sold”?  Your business model and your performance metrics will give you the answers!


Kenneth Shilson is President of Subprime Analytics (www.subanalytics.com) which provides computerized subprime auto portfolio analysis using proprietary data mining technology.  To date, the company has analyzed over 2 million subprime auto deals aggregating $20 billion.  The company provides portfolio analysis, profit and cash flow enhancement and other consulting services to operators and capital providers nationwide.  Mr. Shilson is the President and Founder of NABD, which merged with NIADA on Jan. 1, 2018.  A copy of the latest subprime benchmarks report can be obtained by emailing him at ken@kenshilson.com or by calling 832-767-4759.