Subprime is growing so rapidly as a revenue source for franchised dealers that it has become indispensable for closing sales on almost every new-vehicle and used-vehicle brand.

Long an unsung product at midline or luxury brand dealers, the subprime or nonprime loan or lease has evolved into a closing “must” for Prestige Buick-Pontiac-GMC, Ypsilanti, MI.

“Subprime loans or leases now are used on 25% of our vehicle sales,” says Dave Garon, sales and F&I manager for the Prestige auto group store. “More buyers than ever are qualifying only for subprime, because of job layoffs, delinquencies on credit-card payments, too many bounced checks and the like.”

Garon tells a poignant tale: “A lady came in just yesterday looking for a new car. Her car had been totaled and she was frantic to get new wheels.” But her credit score was 346 which, in the old days, would have disqualified her for even a junker.

“We went to work on it. We found a lender willing to take the deal. The thing is that if she couldn’t get a car here, she’d be out the door and gone forever. Now she’s a customer for life.”

AutoUSA, a lead-referral subsidiary of AutoNation Inc., the nation’s largest dealership chain, says it has added special-finance leads as another option for its more than 4,000 dealer clients, including AutoNation’s 269 stores.

The good news for dealers buying special-finance leads is that these tend to be “cleaner” than regular leads, which should translate into higher closing rates for these leads.

AutoUSA says that’s because, if a consumer is willing to volunteer name, income, address, approximate credit score and other sensitive information that is asked on the lead form, then that person probably has serious car needs.

Phil Dupree, general manager of Fort Lauderdale, FL-based AutoUSA, says more dealers are creating separate departments to handle subprime customers effectively.

Brown Pontiac-Hyundai in Toledo, OH, runs a separate special-finance lot with “dedicated” vehicles across the street from its dealership on the city’s auto row. Brown is the largest subprime vehicle seller in northwest Ohio.

In addition to their AutoCare initiative for furnishing special-finance leaders to dealers, veteran subprime lender AmeriCredit Corp. has expanded its scope by entering the prime and near-prime market. The firm purchased two smaller finance companies last year – Bay View Acceptance Corp and Long Beach Acceptance Corp.

AmeriCredit COO Preston Miller tells Ward’s Dealer Business that the 15-year-old company, which has about 1 million customers and more than 10,000 franchised and independent dealer clients, now services customers ranging from maximum to minimum credit scores.

Lease and special finance have not often mixed. But they do in the current market. Captive auto lenders are encouraging dealers of their brands to accept applications for secondary-finance leases on vehicles, if loans are not suitable.

In addition, as an incentive to outbid competitors for subprime loans or leases, some providers are requiring dealers to get down payments and to pony up “acceptance fees” of up to $3,000 per deal for processing applications.

“The lenders know reserves and profits on subprime loans can run up to 21% or even more,” an Illinois Ford-Lincoln-Mercury dealer tells Ward’s. “So they ask for a consideration to take on the risk of a subprime customer. It’s a moneymaker all the way around.”

Dealer profit margins are higher due to the interest rates being higher, typically 21% or even more, on these types of loans.

DuPree says: “With more dealerships looking for ways to remain profitable in 2007, many realize that the higher margins in the subprime market can give them a competitive edge.”

Here are AutoUSA tips for successful special-finance operations at dealerships:

  • It is highly recommended, if not necessary, for a dealer to have a separate department that is set up to handle special-finance leads, as there are issues surrounding these leads that require special handling.
  • Questions that must be asked about a person’s credit history (i.e. have they filed bankruptcy?) and the reasons for their lower credit scores (i.e. divorce, job loss, etc.) require sensitivity and knowledge of the legalities.
  • Staffers in a special-finance department work more closely with the various banks or lending institutions to finance the loan, as more information is needed and there is more paperwork required for this type of loan.
  • Dealer should stock the right inventory for this type of customer. On the plus side, a special-finance customer isn’t as picky as someone who can finance a $30,000 new car. The special-finance customer just wants a car. A dealer should stock up on low-end vehicles for this customer. These cars are typically older, with higher mileage.