Many people mistakenly think of subprime borrowers as a small group of deadbeats who shouldn’t get loans in the first place, says Jim Landy, CEO of CarFinance Capital.

“In fact, subprime represents a significant percentage of lending and the national economy,” he says. “For car dealers, there’s no way to ignore it.”

Today, about 47% of American consumers and 36% of car buyers fall into the less-than-prime categories. It’s an underserved segment, Landy tells WardsAuto.

CarFinance started last year as a firm offering loans to car buyers with credit scores ranging from 525 to 675.

Of the auto loan applications the company receives, about 40% are eligible for loans, and about 20% of that group ends up getting financed.

“We like to start where most commercial banks stop,” says Landy, who in 1989 founded Triad Financial, one of the largest non-prime auto lenders. He headed it until 2005.

Credit-bureau checks make it relatively easy for subprime lenders to spot serial deadbeats who show little interest in paying back loans.

But other people of higher character can end up in subprime categories for different reasons, ranging from an inability to pay high medical bills if they lack health-care insurance to the ill effects of a divorce.

“Divorce can result in behavior that is not conducive to good credit,” Landy says. “There are emotional challenges. For instance, someone in the midst of a divorce can go on a credit-card shopping spree and amass debts they can’t pay back.”

Most subprime-level consumers who end up defaulting on loans do so because they lack the financial cushions of more affluent people.

“They don’t have cash-flow benefits to fall back on,” Landy says. “They don’t have money in the bank or mortgage equity. So, if the job stops, cash flow stops and the loan-payment stops.”

Loan officers and analysts decide who gets a CarFinance loan, he says. “We’re more engaged, and more open to dialogue with a dealer.”

Analysts looking at a credit-history imperfection typically ask, “Is this something that is going to repeat itself or is it more muddied than that?” Landy says.

Demographically, CarFinance customers are 40-year old blue collar workers earning $50,000 a year. About 70% of them buy used cars.

sfinlay@wardsauto.com