The Future of Sub-prime Paper

The Future of Sub-prime Paper

There are two elements in the deal over which the dealership has no control: One is the trade pay off; the other is the customer’s credit score. Both of these numbers belong solely to the customer. However, the sooner we learn the score, the better we can deal with it, leaving the future of sub-prime credit to become what we make of it.

Credit Credentials

My conversations with finance managers from coast to coast reveal their general consensus that credit scores are not on the upswing. This means our customers are still facing challenges to keep their jobs, stay healthy, and recover from changes in family status due to death and divorce. The good news for sub-prime business is that those who survive life’s surprises still require transportation, and for the most part, that means credit to pay for their transportation. It therefore follows that sub-prime lending will become an increasingly more important part of each dealership’s business today and into 2008.

Sub-prime customers represent about 25% or so of most marketplaces. In some markets, the percentage of credit-challenged customers can reach 40%. What does this mean to you? Nothing less than 2 to 4 out of every ten of your dealership’s customers will bring some level of credit difficulty to the deal. Numbers like these require that F&I managers and sales professionals alike are prepared to cultivate relationships with sub-prime lenders and conduct skillful interviews with customers as the calendar year rolls over.

Early Turns

When walk-in customers who do not qualify for mainstream finance are turned early in the process, the result is a happier buying experience. I have yet to encounter a customer who enjoys it when the first sales professional they encounter lands them on a vehicle they cannot afford. What typically ensues is that after two or more weeks of trying to force fit mainstream finance, the sales manager turns the deal over to the special finance department to try to salvage the sale. Informative interviews promote early turns, abbreviate the sales process, and encourage happy customers to spend money on extras for a vehicle they can afford.

The Right Balance

While no store wants to be known in the community as the “poor credit” place, healthy sub-prime business balances reality with respect. Just as “special finance” accurately denotes the credit-challenged aspect of the business, so can a name like “auto loan department” convey a bias-free opportunity for people who need a fresh start in order to meet their transportation needs.

What we learn about our customers, how we work with our lenders, and the label we place on out-of-the mainstream financing all have a direct impact on our ability to match customer and vehicle, deal structure and funding source. The knowledge we gain and the skills we apply will combine to ease the process of purchasing a vehicle for the growing number of customers with credit dings we can’t control.

World of Special Finance – Canada eNewsletter, August 22, 2007