Subprime Out of Intensive Care

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 in Orlando, FL. 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.

“Many prime customers became casualties of the economy” dropping into non-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.

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.”