Credit Acceptance: Essential Service, or Profit Over People?

Ryan Heshmati

May 6, 2022

Background:

About a year ago, I was researching public American companies when I came across a multi-billion dollar auto lender that had just taken a hit in its stock price. Credit Acceptance Corporation (CACC), which faced, and still faces, regulatory attacks, is a subprime auto lender. Essentially, they allow borrowers who have poor credit scores and are less likely to pay to still access capital, but at much higher interest rates. When I was first introduced to the company, it traded around $350 a share; now it is over $600.

Business:

CACC has been characterized as a predatory lender in the media, partly because they repossess 35% of the cars they fund. It is the high interest rates, with an average of 23% according to NBC News, and a unique loan structure that help the company deliver about $60 in earnings per share. 

An average Credit Acceptance car loan involves a 20% downpayment from the borrower and an advance of 44% of the value to the dealer from CACC. Until Credit Acceptance receives 130% of the advance to the dealer, the company receives the full sum of all payments being made. Once the 130% threshold has been met, the dealer gets 80% of future payments, and CACC collects 20% as a servicing fee. Two thirds of the company’s loans work like this, the other third are identical in most areas but involve a larger advance to the dealer at origination in exchange for all future payments of the loan going to Credit Acceptance.

The model has been quite profitable for CACC shareholders, who have seen the stock skyrocket about 188% in the last five years alone.

Legal Troubles:

Because of its highly controversial lending practices, the company has faced lawsuits from many states. For instance, Credit Acceptance settled with the Massachusetts Attorney General, who alleged “unfair and deceptive practices,” for $27.2 million in 2021. Regulatory fears for the company are a serious cause for concern, due to the nature of their business, and may explain the high short interest of over 22% according to Fintel.

Ethics:

There can be an argument made on both sides of the ethics of CACC’s business model. Many may argue that the company preys on trapping borrowers, who have nowhere else to go, to obtain loans they cannot afford. This can be substantiated by the high default rate and interest rate that comes with the Credit Acceptance loan portfolio. On the other hand, some might point out that subprime borrowers need CACC because traditional financing options are unavailable to them. According to Seeking Alpha’s Yousef Tav, borrowers with lower than 650 FICO scores make up 95% of the company’s loan portfolio. Individuals who already have such a poor credit history would likely be left without a mode of transportation, if  unwilling to take out a subprime loan.

Final Thoughts

In summary, Credit Acceptance Corporation’s purpose, profits, and risks make the company particularly notable, both financially and ethically. Only time will tell whether regulation will finally catch up to CACC, or if it will continue to see its stock become more valuable.