A decade ago franchised dealers did not know how to handle sub-prime customers nor did they much want them in their showrooms.
Credit scores from excellent (750 plus) to poor ( 649-600) were a determining factor in whether a customer bought a car from franchised dealer with an air conditioned waiting room and amenities like cold bottled water and exotic coffee or a converted trailer home on a small car lot in a deteriorating neighborhood near the highway.
Badcredit.org did a study which concluded that one third od Americans have lower credit scores. That adds up to millions of potential customers who qualify as sub-prime customers. The recent recession has added to those figures making it a customer base that cannot be ignored any longer.
In metropolitan markets with a diverse population and just as diverse credit ratings several dealerships began to change their marketing plan to include sub-prime customers.
Some dealers struck gold by putting processes in place to assist customers who have had credit problems. Advertising was designed to market to those customers and used car departments constructed buying plans to stock vehicles that were payment affordable.
Treating those customers with respect and eliminating references like ‘bogues’ and roaches helped greatly in welcoming customers to new car showrooms.
Again things have changed tremendously in a decade.
Those dealers that installed the best practices to market to credit challenged customers have success . Dealers who have decided to pursue this business aggressively have boosted their monthly unit sales by 25 to 30 percent.
“The right attitude about the special finance buyers, coupled with the right processes for capturing their business, can help a dealer sell more vehicles” said Ted Moore part owner of Metro Ford of OKC in Oklahoma City and several other franchised dealerships in Oklahoma and Oregon. Most dealers, he says, turn away a good number of these buyers every day, often without understanding their potential.
The special finance opportunity today is absolutely huge, but only 25 percent of all dealers are achieving anything near the potential they could in special finance, says Moore. The average sub-prime customer would much rather get a new car from a known dealer than from a note lot or Larry’s Used Cars, but they don’t know that they can do that, he adds.
Moore feels that dealers need to communicate that they’re in the business to match credit-challenged consumers with the right lenders and the right vehicles, if they want to get their share of this lucrative market.
Nathan Holmes, Special Finance Manager at Metro Ford says” Just because people have bad credit doesn’t mean they are bad people. I help people with credit issues buy the car they want at a price and payment they can afford. The key is to get the customer to the point where they do not need my services.”
With the growth in the subprime auto market, now is a good time to change your perceptions of special finance customers. Outdated attitude might be standing in the way of potential sales of both used and new vehicles.
While there are still risks inherent in dealing with special finance customers, the climate has changed with several very large financial institutions such as, Chase, Capital One, and Citibank, moving into the lending mechanism over the last decade. In 1995, if a dealer got into special finance, they typically dealt with smaller financial institutions. The landscape is very different now. With a completely new set of large financial institutions involved, it should help minimize any risk.
Major auto lending sources like Ford and GM will also buy deals if they are structured for the customer to benefit as well as the dealer.
The subprime customer is generally defined as a buyer with a credit or BEACON score of 650 or less. As the economy cools and the housing market continues to recover, the number of consumers who fall into this category will only continue to grow.
Melinda Zabritski, director of automotive credit for Experian Automotive notes that for the second quarter of 2006, nearly 36 percent of all loans originating during that time were below 650. That percentage has risen to 37.4 for the same period this year. One significant cause of credit deterioration is personal bankruptcy. According to the American Bankruptcy Institute, U.S. consumer bankruptcy filings increased more than 37 percent nationwide in June, compared to the previous year. It should be noted though, that 2006 filings were the lowest since 1988, mostly driven by the implementation of more restrictive bankruptcy laws in 2005.
“This is a market that is growing, says Zabritski. Of loans below 650, nearly a third falls below the 550 level, which is the biggest growth area in the high-risk category space” said Zabritski.
Today’s subprime buyer is often a once-creditworthy buyer. The continuing trend of upside-down buyers adds to the troubling credit climate the US is just starting to get out of. The economics are these consumers require transportation, and a dealer structured to meet their unique credit needs can get their business and grow their net profits as a result.
Most people who have been in this position for some time realized their car buying experience is different from that of their more credit-worthy peers. These buyers, however, still warrant respect. Despite credit woes, their dignity remains intact and they want to be treated fairly and professionally.
Subprime auto buyers understand that your role as a dealer is not to put them into the vehicle of their hearts desire, but rather to get them financed. The vehicle they will drive once you get them financed isnt that important.
Credit-challenged customer’s aren’t all concerned about the type of vehicle they can purchase, but are more concerned about whether or not they’ll get approved for credit.
What is your sub-prime process?
A marketing and sales process in your dealership for handling these buyers is necessary to achieve any real success.
Bringing on qualified, dedicated personnel who specialize in working with sub-prime customers is a critical component for success. Having an Internet manager work your special finance customers simply will not work. Sub-prime buyers have special needs and require special handling and follow-up, says Holland.
Too often, dealers cherry pick these buyers- they pull credits and if the shoppers rating doesn’t meet the dealers criterion, the buyer is given the heave-ho. This too is old thinking and should be filed under the out with the old category.
The credit score doesn’t necessarily mean anything, Holland notes. A lot of rich people have bad credit and pay with cash or have co-signers. You need a process to maximize these opportunities.
Dealers who try to put every sub-prime shopper into a vehicle will get 10-12 percent approved, Holland notes, but again, the right process must be in place to make this possible.
One part of such a process is having specialists who understand this buyer, has the patience to listen to their hard-luck story, and can work the deal to get the right match. Software tools that help match lender, payment call, and inventory to the buyer can speed the process and remove risk of mismatching these criteria.
The sub-prime sales process has to be slowed down, one dealer notes. It requires special listening and emphasizing skills. Even though these buyers credit is bad, they feel they have buying power because they hear the ads on radio and TV that tell them no matter what their credit,they can be approved.
So-called sub-prime buyers feel they deserve to be treated like a prime buyer, whether entitled to it or not, and if they don’t get that treatment from your dealership they’ll go elsewhere.