DETROIT -- General Motors is getting into the subprime lending business. And that means taxpayers are, too.
But these car loans aren't as risky as you might think.
GM, majority owned by taxpayers, is buying a company that makes car loans to shoppers with poor credit. Unlike home loans, though, the risk in subprime auto lending is relatively low and may reward GM. The company hopes to boost sales by making loans and leases to buyers that it must now turn away for lack of financing.
GM will pay $3.5 billion in cash for AmeriCredit Inc., a Fort Worth-based company with 800,000 customers and a $9 billion portfolio of subprime auto loans. GM's purchase will be made out of its $30 billion cash stockpile, one that is funded in part by the government.
AmeriCredit had already been helping GM with subprime loans, which now amount to 4 percent of the car company's sales. GM Chief Financial Officer Chris Liddell expects that to grow by a percent or two, a significant number considering that GM is on pace to sell over 2 million cars and trucks in the U.S. this year.
About 40 percent of U.S. customers have below prime credit scores, Liddell said. "Clearly there's an opportunity to bring more people into our showrooms and help them with finance."
Dealers and GM executives have complained for months that they're losing business because many customers can't get loans or leases.
Historically, the loan approval rate for borrowers with poor credit -- those with scores below 620 -- ran about 60 percent. Now, it's running at 9 percent.
"(GM) absolutely needed to add this segment of the market to meet the needs of the customers coming into our dealerships," Mike Jackson, CEO of AutoNation Inc., the largest auto dealer chain in the United States, said after the deal was announced Thursday.
Customers with poor credit couldn't get an in-house loan from a GM dealer and faced additional hurdles to secure financing from an outside bank. Although access will improve, ultimately loans may not become easier to obtain because AmeriCredit will likely stand by its current lending criteria, said Melinda Zabritski, director of automotive credit at Experian, a credit reporting agency.
Toyota (NYSE: TM) and Ford (NYSE: F) have their own finance companies, which enable them to offer sweeter deals. GM lost its ability to finance cars at cheaper interest rates when it sold control of its finance arm four years ago.
Auto lending, compared with other consumer loans, is fairly low risk. Banks or finance companies can repossess cars if owners stop paying. Drivers who fall behind on bills tend to pay their car payments ahead of other debt because they need transportation to get to work.
Fewer borrowers are falling behind on their car loans than a year ago, according to Experian. The 30-day delinquency rate hasn't changed dramatically in the last year, and currently remains below 3 percent for all auto loans. Auto repossessions for banks remain low at less than 1 percent of loans.
Under the deal, GM will pay $24.50 for each share of AmeriCredit, a 24 percent premium over the closing price July 21.
The sale, subject to AmeriCredit shareholder approval, is expected to close in the fourth quarter.
AP Auto Writer Dan Strumpf in New York contributed to this report.