The View from the Finance Desk_2015

by Wendy on February 10, 2015

By: Joseph McKinney of Oregon Roads

Do you have to pay early termination penalties when you cancel your financing due to a payoff, sale or trade-in? I’ve met people who won’t lease or finance again because of hidden costs and clauses in those contracts. All the consumer protection laws go out the window when your company is the customer. Caveat Emptor (buyer beware) indeed!

My friends have asked me why a state with a small population like Oregon has an inordinate amount of RV sales and financing activity. The answer may just be in the details. A consumer-oriented State Attorney General crafted Oregon’s finance contract. It does not allow early termination penalties and contains a higher level of consumer protection than contracts you might sign in other states. Because few RVers actually carry their loan to term, just like homeowners, there is a clear advantage to our contract. Oregon is a magnet for RV financing, and dealers know that they can’t sell you your next coach if they can’t get you out of this one. The lower payoff is a distinct advantage.

It’s been a great year for Oregon Roads and the RV industry in general. We’ve seen volumes increase to 2007 levels, and those were near the record set in 2005. Oregon Roads is a finance and leasing company focused on “rolling stock”. That means primarily vehicles and RV’s. Although the news is filled with stories of record sales of vehicles, the mainstream media tends to ignore the RV industry.

So what’s trending up? Among existing RVers, instead of remodeling their existing coach we see them trading up to perhaps a 3 or 4 year newer model. Instead of paying for new upholstery and a new kitchen, they trade in one coach for a newer model that already has the kitchen and upholstery upgrade.

We’ve seen as many people trade down into smaller models as we’ve seen consumers trade up to larger ones. That’s new. It seems to be following trends in housing, where retired empty nesters are selling their large homes and moving into something more compact, with lower maintenance and lower carrying costs.

Economic stability has also created demand for new product, and the limited availability of late model, lower priced used units is likely to continue that trend. That follows a similar sequence in the car business, where used vehicles became scarce and higher priced to the point where they actually stimulated new vehicle sales. New, towable RV’s have sold well this year and as long as rates stay low I expect to see increased demand for new RV’s, including the higher priced coaches. Marathon Coach has nearly doubled their manufacturing staff this year based on increased order volumes.

Our underwriters have enjoyed the climate of stability too. Their standards remain high. If you don’t have good credit you’re not going to get an approval. But they no longer require evidence that you could pay cash instead of financing. Requiring large down payments and only approving applicants who don’t need the loan put a damper on sales. Slower sales reduced resale values too, and we know lenders base their decision on the collateral, so sales were further diminished. The spiral is certainly heading in the other direction today as we see higher volumes and higher trade-in values. We expect some campers who’ve been sitting on the sidelines to come back to this market before rates increase in any meaningful way.

And what’s trending down? Two things come to mind: credit union financing was expected to positively impact RV sales and it has not had that result. Oregon Roads originates loans for both the credit union association and the banks that are the largest players in the field. Perhaps because credit unions had massive losses in their RV portfolios they have reduced terms and often go a maximum of only 12 years. That compares to 15-20 year terms for qualified buyers available at our banks.

Credit unions also have higher rates, averaging 1.49% APR higher than our best banks. Fewer than 10% of our originations are assigned to credit unions, in a region that is dominated by high credit union memberships. Folks like their credit unions, but they’re not willing to support them by paying thousands extra in interest.

The other down-trend is LLC financing. At one point a popular option, few applicants are going to the trouble and expense of forming an LLC or putting their RV in their company name. Reasons for this include:

1 – Higher rates. Companies borrow at either a rate higher than consumer rates or at variable interest rates. When we can fix a rate at today’s historic low rates, why risk a variable rate option?

2 – LLC’s, Sub S corps and proprietorships all require legal representation and accounting and financial expenses that inflate the cost of ownership. Those expenses are reoccurring, annual expenses.

3 – Personal Guarantees are required so the company owner has the same liability as if it were in his or her personal name.

4 – Insurance and perhaps even DMV fees are higher for businesses than consumers.

5 – Commercial lending does not offer consumer protections.

6 – Most of the underwriters who loaned to LLC’s have exited the business.

Neither of these downward trends have slowed progress in RV sales and financing thanks to the strength of traditional underwriting and rates considerably lower than anticipated.

RV dealers recommend their customers to Oregon Roads for financing. Sometimes shoppers find us independently and often our existing clients return to us to finance their next RV or use our buying service to arrange their next vehicle purchase or lease. We can finance and lease any manufactured brand. And because we tend to stay in the middle of this spider web, we have a unique opportunity to compare the trends in both RV and auto finance. We use the data to predict consumer attitudes and patterns that not only reflect consumer sentiment; they forecast our focus for the coming year.

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