Subprime Auto Lending Leaves Intensive Care

ORLANDO – Not yet out of the hospital, subprime auto financing at least has left the intensive-care unit.

The credit crunch that hit in 2008 hurt virtually all levels of financing. Subprime suffered the most, making it tough for people with low credit scores to get car loans.

But so-called special financing “is on the way back,” says dealership consultant Rob Hagen, CEO of SpecialFinanceCoach.com. “It’s a second coming.”

Showing faith but less zeal is Tim Zierden, a divisional general manager at DealerTrack Inc., provider of indirect-lending services to dealerships.

“Subprime has made a little bit of a comeback,” he says “The feedback is getting a little more positive.”

Signs of life: Some finance firms say they’ll consider car-loan applications from consumers with relatively low Fair Isaac Corp. credit scores of less than 500.

“I thought, ‘Wow, I haven’t heard that in a while,’” Hagen says at the F&I Management and Technology conference here. FICO scores range from 300 to 850.

If auto financing has changed, so has the profile of the subprime customer who in the past typically was someone with a checkered credit history or deadbeat tendencies.

But lately, many people with good credit ratings have seen their once-high credit scores fall because of unemployment, underemployment, upside-down mortgages, over use of credit cards and other recessionary ills.

Subprime making “second coming,” says Rob Hagen.

“Many prime customers became casualties of the economy” dropping into near-prime and subprime categories, says Hagen, a 15-year dealership veteran before becoming a consultant.

“Dealers need to know how to handle those customers, how to deal with the transitional situation and explain why their interest rate is now 15% and no longer 5%,” he says.

Some consumers with respectable 780-750 scores a year ago saw their credit ratings “bruised” Zierden says.

Customers whose scores dropped 100 points from the mid-700s aren’t goners, he says. “It’s just a matter of finding the right car for them. They remain good customers.”

Realizing bad things happen to good people, many lenders now appear willing “to hear stories of why customers are where they are, and try to put a deal together,” Hagen says.

That position is refreshing, because “too often lenders are quick to tell you what’s wrong with a deal,” he says.

Some bold lenders are marketing to bankrupt consumers. “Those finance companies can’t give a car loan right away, but can after people come out of bankruptcy,” Hagen says. “It’s a fresh start.”

Wooing people who went bankrupt carries inherent credit risks, but benefits can outweigh those. “It’s a great way to build customers for life,” Hagen says. “They’re vulnerable; they’re appreciative.”

Dealers should make sure their staffers know how to read credit-bureau reports, he says. “It helps you detect when someone is coming out of a jam, so you can sell his or her story to a lender.”

Conversely, credit-report literacy also aids dealership personnel in deciding whether they want to go to bat for a dubious loan applicant, such as someone who just had a car repossessed.

Traditional subprime vehicle buyers shop for basic transportation, not the car of their dreams. New arrivals to subprime must adjust to that, abandoning or at least shelving aspirational buying habits from better times.

Dealers need a plan centered on proper inventory offerings if they want a chunk of special-financing business, Hagen says. “The nameplate on the car doesn’t matter to subprime customers. They may want a Ford Expedition, but what they need is transportation.”

However, dealers shouldn’t assume the worst car on the lot is just what the doctor ordered for someone who is financially hurting.

“A special-finance car should be big enough to fit a family, because most subprime people have kids,” Hagen says. “Ideally, you want to show them cars with eye appeal.”

Offer some equipment, he says. “If you give them power windows and locks, they are thrilled. If you give them a CD player, you’re their hero. But don’t ask if they want something like a sunroof; you’re just opening yourself up for problems.”

It’s a win-win if a dealer can put a subprime customer in an aging vehicle that’s overstaying its welcome on the lot, Hagen says.

He tells dealers to learn as much as they can about a subprime customer’s credit woes.

“Find out right away,” he says. “If you do, you can usually overcome the obstacles.” If lenders discover unpleasant information on their own after the loan application is forwarded to them, “it’s usually too late.”

Dealers also should put subprime customers in a good frame of mind.

“We had nothing to do with them getting into a bad situation but we can help,” Hagen says. “In showing them only select vehicles they qualify for, say, ‘We have limited options, but we have options.’”

If lenders reject a subprime-loan application, dealers should tell customers what they can do to improve their credit health, such as catching up on mortgage payments.

Post turndown, it helps to send the would-be buyers a good-news letter saying, “We can give you a great deal on a $12,000 car if you put down $3,000,” Hagen says. “They may not have the $3,000, but they now have a goal and know what they need to do. This can really work.”

Lenders today more than ever play a big role in vehicle sales, Zierden says. “The ultimate decision maker in 90% of car deals is the bank.” If dealers can’t get loans for customers, “the cars aren’t going anywhere.”

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