CREDIT ACCEPTANCE CORP

Previous wording

The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included in Item 8 - Financial Statements and Supplementary Data, of our 2023 Annual Report on Form 10-K, as well as Part I - Item 1 - Financial Statements, of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

Current wording

The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included in Item 8 - Financial Statements and Supplementary Data, of our Annual Report on Form 10-K for the year ended December 31, 2024, as well as Part I - Item 1 - Financial Statements, of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

Previous wording

For the three months ended September 30, 2024, consolidated net income was $78.8 million, or $6.35 per diluted share, compared to consolidated net income of $70.8 million, or $5.43 per diluted share, for the same period in 2023. The increase was primarily due to an increase in finance charges, partially offset by an increase in interest expense. Our results for the three months ended September 30, 2024 included:

Current wording

For the three months ended March 31, 2025, consolidated net income was $106.3 million, or $8.66 per diluted share, compared to consolidated net income of $64.3 million, or $5.08 per diluted share, forthe same period in 2024. The increase was primarily due to an increase in finance charges and a decrease in provision for credit losses, partially offset by an increase in interest expense. Our results and achievements for the three months ended March 31, 2025 included the following:

Previous wording

We use a statistical model to estimate the expected collection rate for each Consumer Loan at the time of assignment. We continue to evaluate the expected collection rate for each Consumer Loan subsequent to assignment. Our evaluation becomes more accurate as the Consumer Loans age, as we use actual performance data in our forecast. By comparing our current expected collection rate for each Consumer Loan with the rate we projected at the time of assignment, we are able to assess the accuracy of our initial forecast. The following table compares our aggregated forecast of Consumer Loan collection rates as of September 30, 2024, with the aggregated forecasts as of June 30, 2024, as of December 31, 2023, and at the time of assignment, segmented by year of assignment:

Current wording

We use a statistical model to estimate the expected collection rate for each Consumer Loan at the time of assignment. We continue to evaluate the expected collection rate for each Consumer Loan subsequent to assignment. Our evaluation becomes more accurate as the Consumer Loans age, as we use actual performance data in our forecast. By comparing our current expected collection rate for each Consumer Loan with the rate we projected at the time of assignment, we are able to assess the accuracy of our initial forecast. The following table compares our aggregated forecast of Consumer Loan collection rates as of March 31, 2025, with the aggregated forecasts as of December 31, 2024, and at the time of assignment, segmented by year of assignment:

Previous wording

Consumer Loans assigned in 2018 through 2020 have yielded forecasted collection results significantly better than our initial estimates, while Consumer Loans assigned in 2015, 2016, and 2021 through 2023 have yielded forecasted collection results significantly worse than our initial estimates. For all other assignment years presented, actual results have been close to our initial estimates. For the three months ended September 30, 2024, forecasted collection rates declined for Consumer Loans assigned in 2021 through 2024 and were generally consistent with expectations at the start of the period for all other assignment years presented. For the nine months ended September 30, 2024, forecasted collection rates improved for Consumer Loans assigned in 2019, declined for Consumer Loans assigned in 2021 through 2024, and were generally consistent with expectations at the start of the period for all other assignment years presented.

Current wording

For the three months ended March 31, 2025, forecasted collection rates improved for Consumer Loans assigned in 2020, declined for Consumer Loans assigned in 2022, 2024, and 2025, and were generally consistent with expectations at the start of the period for all other assignment years presented.

Previous wording

(3)Represents activity for the nine months ended September 30, 2024. Information in this table for each of the years prior to 2024 represents activity for all 12 months of that year.

Current wording

(3)Represents activity for the three months ended March 31, 2025. Information in this table for each of the years prior to 2025 represents activity for all 12 months of that year.

Previous wording

(1)Represents advances paid to Dealers on Consumer Loans assigned under our Portfolio Program and one-time payments made to Dealers to purchase Consumer Loans assigned under our Purchase Program as a percentage of the initial balance of the Consumer Loans. Payments of Dealer Holdback and accelerated Dealer Holdback are not included.

Current wording

(1)Represents advances paid to Dealers on Consumer Loans assigned under the Portfolio Program and one-time payments made to Dealers to purchase Consumer Loans assigned under the Purchase Program as a percentage of the initial balance of the Consumer Loans. Payments of Dealer Holdback and accelerated Dealer Holdback are not included.

Previous wording

The spread between the forecasted collection rate as of September 30, 2024 and the advance rate ranges from 13.2% to 23.7%, on an annual basis, for Consumer Loans assigned over the last 10 years. The spreads with respect to 2019 and 2020 Consumer Loans have been positively impacted by Consumer Loan performance, which has exceeded our initial estimates by a greater margin than the other years presented. The spread with respect to 2022 Consumer Loans has been negatively impacted by Consumer Loan performance, which has been lower than our initial estimates by a greater margin than the other years presented. The higher spread for 2024 Consumer Loans relative to 2023 Consumer Loans as of September 30, 2024 was primarily a result of Consumer Loan performance, as the performance of 2023 Consumer Loans has been lower than our initial estimates by a greater margin than 2024 Consumer Loans. Additionally, 2024 Consumer Loans had a higher initial spread, which was primarily due to a decrease in the advance rate.

Current wording

The spread between the forecasted collection rate as of March 31, 2025 and the advance rate ranges from 12.6% to 24.0%, on an annual basis, for Consumer Loans assigned over the last 10 years. The spreads with respect to 2019 and 2020 Consumer Loans have been positively impacted by Consumer Loan performance, which has exceeded our initial estimates by a greater margin than the other years presented. The spreads with respect to 2021 through 2023 Consumer Loans have been negatively impacted by Consumer Loan performance, which has been lower than our initial estimates by a greater margin than the other years presented. The higher spread for 2025 Consumer Loans relative to 2024 Consumer Loans as of March 31, 2025 was primarily a result of Consumer Loan performance, as the performance of 2024 Consumer Loans has been lower than our initial estimates by a greater margin than 2025 Consumer Loans.

Previous wording

(2)Represents advances paid to Dealers on Consumer Loans assigned under our Portfolio Program and one-time payments made to Dealers to purchase Consumer Loans assigned under our Purchase Program as a percentage of the initial balance of the Consumer Loans. Payments of Dealer Holdback and accelerated Dealer Holdback are not included.

Current wording

(2)Represents advances paid to Dealers on Consumer Loans assigned under the Portfolio Program and one-time payments made to Dealers to purchase Consumer Loans assigned under the Purchase Program as a percentage of the initial balance of the Consumer Loans. Payments of Dealer Holdback and accelerated Dealer Holdback are not included.

Previous wording

The spread as of September 30, 2024 on 2024 Dealer Loans was 21.2%, as compared to a spread of 18.3% on 2023 Dealer Loans. The increase was due to Consumer Loan performance, as the performance of 2023 Dealer Loans has been lower than our initial estimates by a greater margin than 2024 Dealer Loans.

Current wording

The spread as of March 31, 2025 on 2025 Dealer Loans was 21.9%, as compared to a spread of 21.1% on 2024 Dealer Loans. The increase was primarily a result of Consumer Loan performance, as the performance of 2024 Dealer Loans has been lower than our initial estimates by a greater margin than 2025 Dealer Loans.

Previous wording

The spread as of September 30, 2024 on 2024 Purchased Loans was 21.5%, as compared to a spread of 17.8% on 2023 Purchased Loans. The increase was primarily a result of a higher initial spread on 2024 Purchased Loans, due to a higher initial forecast and lower advance rate. Additionally, the performance of 2023 Purchased Loans has been lower than our initial estimates by a greater margin than 2024 Purchased Loans.

Current wording

The spread as of March 31, 2025 on 2025 Purchased Loans was 21.4%, as compared to a spread of 21.7% on 2024 Purchased Loans. The decrease was primarily a result of a lower initial spread on 2025 Purchased Loans, due to a higher advance rate.

Previous wording

Our strategy for accessing capital on acceptable terms needed to maintain and grow the business is to: (1) maintain consistent financial performance; (2) maintain modest financial leverage; and (3) maintain multiple funding sources. Our funded debt to equity ratio was 3.8 to 1 as of September 30, 2024. We currently utilize the following primary forms of debt financing: (1) our revolving secured line of credit facility; (2) Warehouse facilities; (3) Term ABS financings; and (4) senior notes.

Current wording

Our strategy for accessing capital on acceptable terms needed to maintain and grow the business is to: (1) maintain consistent financial performance; (2) maintain modest financial leverage; and (3) maintain multiple funding sources. Our funded debt to equity ratio was 3.9 to 1 as of March 31, 2025. We currently utilize the following primary forms of debt financing: (1) our revolving secured line of credit facility; (2) Warehouse facilities; (3) Term ABS financings; and (4) senior notes.

Previous wording

The following table summarizes changes in Consumer Loan assignment volume in each of the last seven quarters as compared to the same period in the previous year:

Current wording

The following table summarizes changes in Consumer Loan assignment volume in each of the last five quarters as compared to the same period in the previous year:

Previous wording

Consumer Loan assignment volumes depend on a number of factors including (1) the overall demand for our financing programs, (2) the amount of capital available to fund new Loans, and (3) our assessment of the volume that our infrastructure can support. Our pricing strategy is intended to maximize the amount of economic profit we generate, within the confines of capital and infrastructure constraints.

Current wording

Consumer Loan assignment volumes depend on a number of factors including (1) the overall demand for our financing programs and (2) the amount of capital available to fund new Loans. Our pricing strategy is intended to maximize the amount of economic profit we generate, within the confines of capital constraints.

Previous wording

Unit and dollar volumes grew 17.7% and 12.2%, respectively, during the third quarter of 2024 as the number of active Dealers grew 8.8% and the average unit volume per active Dealer increased 8.4%. Dollar volume increased less than unit volume during the third quarter of 2024 due to a decrease in the average advance paid, due to decreases in the average size of Consumer Loans assigned and the average advance rate. Unit volume for the 28-day period ended October 28, 2024 grew 4.6% compared to the same period in 2023.

Current wording

Unit and dollar volumes declined 10.1% and 15.5%, respectively, during the first quarter of 2025 as the number of active Dealers declined 0.1% and the average unit volume per active Dealer declined 9.7%. Dollar volume declined by more than unit volume during the first quarter of 2025 due to a decrease in the average advance paid, resulting from decreases in the average size of Consumer Loans assigned and the average advance rate. Unit volume for the 28-day period ended April 28, 2025 decreased 9.8% compared to the same period in 2024.

Previous wording

The following table shows the percentage of Consumer Loans assigned to us as Dealer Loans and Purchased Loans for each of the last seven quarters:

Current wording

The following table shows the percentage of Consumer Loans assigned to us as Dealer Loans and Purchased Loans for each of the last five quarters:

Previous wording

As of September 30, 2024 and December 31, 2023, the net Dealer Loans receivable balance was 71.6% and 67.7%, respectively, of the total net Loans receivable balance.

Current wording

As of March 31, 2025 and December 31, 2024, the net Dealer Loans receivable balance was 72.7% and 72.3%, respectively, of the total net Loans receivable balance.

Previous wording

Finance Charges. The increase of $65.9 million, or 14.9%, was primarily due to an increase in the average net Loans receivable balance, as follows:

Current wording

Finance Charges. The increase of $57.5 million, or 12.3%, was primarily due to an increase in the average net Loans receivable balance, as follows:

Previous wording

•An increase in salaries and wages expense of $10.6 million, or 15.9%, primarily due to increases in (i) the number of team members as we are investing in our business with the goal of increasing the speed at which we enhance our product for Dealers and consumers and (ii) fringe benefits, primarily due to higher medical claims.

Current wording

Operating Expenses. The increase of $9.4 million, or 7.5%, was primarily due to an increase in salaries and wages expense of $10.1 million, or 12.9%. The increase was primarily due to increases in (i) the number of team members as we are investing in our business with the goal of increasing the speed at which we enhance our product for Dealers and consumers, (ii) stock-based compensation expense, primarily due to equity awards granted to our executive officers and senior leaders, and (iii) fringe benefits, primarily due to higher medical claims.

Previous wording

We recognize provision for credit losses on new Consumer Loan assignments for contractual net cash flows that are not expected to be realized at the time of assignment. We also recognize provision for credit losses on forecast changes in the amount and timing of expected future net cash flows subsequent to assignment. The following table summarizes the provision for credit losses for each of these components:

Current wording

We recognize provision for credit losses on new Consumer Loan assignments for contractual net cash flows that are not expected to be realized at the time of assignment. We also recognize provision for credit losses on forecast changes in the amount and timing of expected future net cash flows subsequent to assignment.

Previous wording

During the second quarter of 2023, we adjusted our methodology for forecasting the amount and timing of future net cash flows from our Loan portfolio through the utilization of more recent Consumer Loan performance and Consumer Loan prepayment data. We had experienced a decrease in Consumer Loan prepayments to below-average levels and as a result, slowed our forecasted net cash flow timing. Historically, Consumer Loan prepayments have been lower in periods with less availability of consumer credit. Changes in the amount and timing of forecasted net cash flows are recognized in the period of change as a provision for credit losses. The implementation of the adjustment to our forecasting methodology during the second quarter of 2023 reduced forecasted net cash flows by $44.5 million, or 0.5%, and increased provision for credit losses by $71.3 million.

Current wording

The decrease in provision for credit losses related to forecast changes was due to a smaller decline in Consumer Loan performance during the first quarter of 2025 compared to the first quarter of 2024. During the first quarter of 2025, we decreased our estimate of future net cash flows by $20.9 million, or 0.2%, to reflect a decline in forecasted collection rates during the period and slowed our forecasted net cash flow timing to reflect lower-than-expected Consumer Loan prepayments, which remained below historical averages. Historically, Consumer Loan prepayments have been lower in periods with less availability of consumer credit. During the first quarter of 2024, we decreased our estimate of future net cash flows by $30.8 million, or 0.3%, to reflect a decline in forecasted collection rates during the period and slowed our forecasted net cash flow timing to reflect lower-than-expected Consumer Loan prepayments.

Previous wording

The increase in provision for credit losses related to new Consumer Loan assignments was due to a 21.0% increase in Consumer Loan assignment unit volume, partially offset by a 15.0% decrease in the average provision per Consumer Loan assignment. The decrease in the average provision per Consumer Loan assignment was due to a lower percentage of Purchased Loans in the mix of Consumer Loan assignments received during 2024, and a decrease in the average advance rates under our Portfolio and Purchase Programs for 2024 Consumer Loans.

Current wording

The decrease in provision for credit losses related to new Consumer Loan assignments was due to a 10.1% decrease in Consumer Loan assignment unit volume and a 3.7% decrease in the average provision per Consumer Loan assignment. The decrease in the average provision per Consumer Loan assignment was primarily due to a decrease in the average advance rate for 2025 Consumer Loans.

Previous wording

•An increase in our average outstanding debt balance, which increased interest expense by $18.1 million, primarily due to borrowings used to fund the growth of our Loan portfolio and stock repurchases.

Current wording

Interest. The increase in interest expense of $22.2 million, or 24.0%, was primarily due to an increase in our average outstanding debt balance, primarily due to borrowings used to fund the growth of our Loan portfolio and stock repurchases.

Previous wording

Provision for Income Taxes. For the three months ended September 30, 2024, the effective income tax rate decreased to 26.0% from 26.6% for the same period in 2023. The decrease was primarily due to the settlement of an uncertain tax position for state income taxes during the third quarter of 2024. For additional information, see Note 12 to the consolidated financial statements contained in Part I - Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

Current wording

Provision for Income Taxes. For the three months ended March 31, 2025, the effective income tax rate decreased to 25.0% from 25.6% for the same period in 2024. The decrease was primarily due to a decrease in the impact of state and local income taxes on our effective income tax rate, primarily related to uncertain tax position estimates, and was partially offset by the recognition of a tax deficiency in the current quarter compared to an excess tax benefit recognized during the first quarter of 2024. For additional information, see Note 10 to the consolidated financial statements contained in Part I - Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

Previous wording

Cash and cash equivalents were $159.7 million as of September 30, 2024 and $13.2 million as of December 31, 2023. As of September 30, 2024 and December 31, 2023, we had $1,684.0 million and $1,505.8 million, respectively, in unused and available lines of credit. Our total balance sheet indebtedness increased to $6,248.9 million as of September 30, 2024 from $5,067.5 million as of December 31, 2023, primarily due to the growth in new Consumer Loan assignments and stock repurchases.

Current wording

Cash and cash equivalents were $528.8 million as of March 31, 2025 and $343.7 million as of December 31, 2024. As of March 31, 2025 and December 31, 2024, we had $1,733.6 million and $1,734.9 million, respectively, in unused and available revolving lines of credit. Our total balance sheet indebtedness increased to $6,705.2 million as of March 31, 2025 from $6,352.9 million as of December 31, 2024, primarily due to borrowings used to fund the growth of our Loan portfolio and stock repurchases.

Previous wording

Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we review our accounting policies, assumptions, estimates, and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2023 discusses several critical accounting estimates, which we believe involve a high degree of judgment and complexity. There have been no material changes to the estimates and assumptions associated with these accounting estimates from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2023, except as described below.

Current wording

Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we review our accounting policies, assumptions, estimates, and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2024 discusses several critical accounting estimates, which we believe involve a high degree of judgment and complexity. There have been no material changes to the estimates and assumptions associated with these critical accounting estimates from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2024.

Previous wording

•Failure to properly safeguard confidential consumer and team member information could subject us to liability, decrease our profitability, and damage our reputation.

Current wording

•Failure to properly safeguard our proprietary business information or confidential consumer and team member personal information could subject us to liability, decrease our profitability, and damage our reputation.