New Age of Subprime

The retail battlefront in the new millennium seems to be special finance or subprime.

For the uninitiated, special finance sounds like nothing more than lenders swapping an interest rate boost for a credit score risk.

Dealers often enter this arena thinking it's as simple as hiring an F&I manager who knows the credit programs of that “other” group of banks. At first those dealers delight in doing some deals with higher than usual gross profits.

Then they might get giddy about the aged or watered-down inventory that is sold off to “get-me-done” customers with spotty credit. What happens next depends entirely on the disciplines of the house.

Sadly, most stores' sales philosophies never went much beyond meet, greet, qualify, close and deliver.

The role of the finance department was more about selling warranties and garnering a bit of credit reserve than about structuring the deal to match the perfect car to the credit and cash of the customer.

The typical store sold the car based on a walk through the lot followed by a test drive, then dumping the deal on the F&I office to get it bought and papered.

Few old-timers viewed the role of the finance department as part of the vehicle sale. Financing was what happened after the sale. The role of the finance manager was to leverage the payment negotiation to enable the sale of extra stuff and create more profit margin for the dealership.

Occasionally it was accomplished by stretching the term or adjusting the rate and down payment. Rarely was it about matching a vehicle to a credit profile. Managing inventory based on its potential for financing was unheard of.

The beginnings of special finance for most of us was the realization that if we put enough good paper through a lending source, it would, in return, accommodate us by buying a couple of “tougher credit” deals here and there.

Sometimes tougher credit was about helping someone buy too much car, sometimes it was about too little down money. Usually it involved a willing customer with a challenged credit history.

Of course, those accommodations were reported to the dealer as reflections of the sales desk's or finance manager's talents.

What's more, if the store was a volume new-car agency putting tonnage through a captive, chances were good that the captive would book some iffy stuff when push came to shove and some new-car volume was needed by the parent auto maker to finish the quarter.

Enter real subprime financing.

Real subprime is not about credit favors and it certainly isn't about pushing rough inventory on desperate consumers. It's about credit for the growing working class with a few credit challenges in their picture.

With today's softer economy, a rising deficit and the burdens of balancing the national budget falling largely on the financial middle class, more and more people are entering the marketplace with a scar or two on their credit skin.

Scarier still is that many of them are becoming hardened to their plight. With their callousness is a growing lack of concern for their indebtedness.

Special finance brings new adventures in contracts in transit, stipulations, conditioned approvals, repossessions, bad checks, identity issues and customers with whom the deal doesn't end on delivery.

Many of today's credit problems are more about slow pay than no pay. But it's increasingly difficult to spot the difference between the credit-challenged and the credit rat.

Moreover, most lender agreements shift the responsibility for weeding out the bad guys onto the dealer. Don't let the box checked “non-recourse” fool you. In the fine print you'll find that discrepancies in the credit application or a failure of the down money to clear on first presentation can turn non-recourse into full recourse in a hurry.

So how's a dealer to manage this opportunity without losing his or her shirt? Easy. Recognize that special finance is not just finance as usual, it's a whole new business. Accept and work from that premise and you'll discover the volume franchise of the new millennium.

Peter Brandow is a dealer in Pennsylvania and New Jersey.