NEW YORK — Capital One Financial Corp.'s auto finance arm is suspending lending funds used by auto dealers to stockpile inventory in the states of New York and New Jersey. The suspension is effective Nov. 1.
This turns up the heat on financially strapped dealers, and indirectly makes it harder for consumers to get loans, particularly for new cars. The credit squeeze is likely to hurt already tepid new auto sales because auto dealers use a large chunk of this funding to stock new cars.
Capital One's move follows similar ones made by the finance arms of Detroit's Big Three auto makers — Chrysler Financial; GMAC LLC, which is partly owned by General Motors Corp.; and Ford Motor Credit. These lenders are also selectively tightening credit to many auto dealers.
The decision to discontinue so-called floorplan financing for these auto dealerships was taken earlier this year, says Tatiana Stead, a spokeswoman for Capital One.
It affects fewer than 20 dealers, she adds. The dealers were told in August that floorplan financing would be discontinued starting November.
"It's a very small program. And it's disconnected from any other auto financing," says Stead. "The business decision is based on a variety of factors. One factor was market conditions."
Dealerships in Louisiana and Texas — the other states where Capital One is active — will continue to receive floorplan financing.
One of the primary ways in which auto finance companies lend to dealers is by extending credit lines. This "floor plan" credit is used by dealers to stock up on new vehicles.
In this "pay-as-you-sell" model, the dealer repays its lender as each vehicle gets sold. This revolving credit line may be compared to the way a credit card works, where the balance gets paid down monthly according to the amount charged.
In the past, auto finance lenders typically offered dealers easy credit. But the credit freeze has made capital scarce, forcing lenders to get tougher on dealers. The tightening of credit makes it costlier for dealers to keep buying new cars. Higher borrowing costs will erode dealer margins and translate into more expensive loans for buyers. In addition, dealer inventories are getting leaner, meaning potential car buyers have fewer options from which to choose.