Subprime Grows as Revenue Source for Franchised Dealers

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.

For example, subprime and nonprime loans and leases have 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 finance and insurance 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.

AutoUSA says these tend to be “cleaner” than regular leads, which should translate into higher closing rates.

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.

Dealer margins are higher because interest rates are higher on these 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.”