Handled right, credit-challenged customers can bring in profits and repeat business.BECAUSE OF THE STORMY JOB CLIMATE around Asheville, N.C., half of the sales at Paramount Kia--including new-vehicle sales--are subprime. As manufacturing jobs go away and service jobs arrive, people who used to buy high-line vehicles may now need secondary financing instead, says general manager Scott Allen.
A few years back, the air seemed to go out of subprime financing, with several major lenders leaving that side of the business. Today, because of layoffs and cutbacks in some markets and high levels of personal debt nationwide, subprime is reviving, with fewer but stronger lenders.
HARDER TIMES = MORE SUBPRIME
Subprime has grown "tremendously" in recent years at Ramey Chrysler/Dodge, Summersville, W.Va., says operations manager Robert Ramey. Secondary-finance deals are now 10 to 20 percent of the store's total.
"It's a big market," says Jack Tracey, executive director of the National Automotive Finance Association (NAF). There are signs of growth, but no one knows the full extent of subprime, partly because there's no strict definition of the term. Some reports say that as much as 40 percent of the borrowing population suffers impaired credit.
"There is more poorer credit" nowadays, agrees Art Spinella, president of CNW Marketing/Research, which has tracked a deterioration in customers' credit scores. (Average FICO scores dropped from 723 in 2000 to 695 in 2004.) STILL MOSTLY USED CARS
Customers who need subprime financing tend to be used-car buyers, simply because their credit histories can't handle high-priced purchases. Used units make up about 90 percent of subprime business, says NAF's Tracey.
Partly because Kia offers affordable entry-level cars, Paramount Kia is an exception. Allen reports selling more new cars than used to subprime customers. Subprime financing of new vehicles doesn't surprise John Haynes, president and CEO of HSBC Auto Finance, San Diego, as new-car prices continue to drop.
But the experience at Rick Weaver Buick/Pontiac/GMC, Erie, Pa., is more typical: Nearly 40 percent of the business is subprime, and almost all of that is used, says vice president Adam Weaver. BENEFITS AND RISKS
"Cars that we might be considering wholesaling" sometimes go to subprime customers, Weaver says. And subprime buyers are an excellent source of repeat business. They appreciate the chance to buy a car, says Paramount Kia's Allen, and they'll tell their friends about you.
Dealers say that gross is at least as high as with primary financing. But, of course, be prepared for a high default rate. Two kinds of people are subprime customers, says dealer Jim Taylor, Taylor Family Auto Group, Great Falls, Mont.: "good people who have had bad things happen to them" and not-so-good people.
Dealers considering going into subprime should understand that "it's not the car business, it's the loan business," says NADA Dealer Academy instructor George Parker. Because of the high default rate, you need to have sufficient cash backing. SUBPRIME PRIMER
Those are the warnings. Here's some advice: Know your customer. Understand how the subprime customer differs from others. In Allen's experience, 9 out of 10 secondary customers will say, "I have some credit issues." Regular customers typically have done research and are shopping a specific brand, says vice president of Chrysler Brands Marketing Kelly Mankin, but the credit-challenged buyer is more likely to say, "'I need transportation and I'm not necessarily picky.'"
Qualify customers first. Instead of looking at a car first, go through the customer's financial information. "Ask probing questions," says Allen, because "there are generally telltale signs" of possible trouble. Subprime customers must prove such things as residence, employment, and income, as well as come up with as many as five personal references. "There's a lot of extra paperwork [and} a lot of extra stipulations," says dealer Weaver.
Stock the right inventory. Dealers must have a range of cars that meet the debt-to-income ratios lenders will accept, says NAF's Tracey. To be approved, customers might have to settle for an alternative. Fitting the customer with the right car--and lender--is key, says dealer Taylor.
Have dedicated, well-trained staff. In most dealerships, F&I employees handle subprime deals, but Allen uses sales managers at his Kia store, believing they're "best equipped to structure the deal" from start to finish. Specific training in subprime is vital, because these sales are so different from regular ones. (Many finance sources offer training.)
Use multiple finance sources. "Some [lenders] like equity, some like job stability, some like strong income," says Allen. His Kia store uses 21 lenders, but that's unusual. NAF's Tracey advises limiting lenders to 5 or so, except in a high-volume operation.
Promote subprime. Dealers should "include a subprime message in all their advertisings," says Peter Martin, a business development director, Carrera Advertising, Bradenton, Fla. Explain that the store has "the ability to help you get financing." Martin recommends having a separate phone number for subprime customers, with a firm such as Call Tracking measuring results.
Martin suggests targeting subprime buyers with direct mail. A separate, secure Web site also helps, because many customers are embarrassed by their credit problems and may prefer to apply online.
And avoid clichés in advertising, says Martin. Simply note that "we have lenders available to work with you." Today's "customers with bad credit are not the same customers we had 10 years ago. These are people that had good credit." You need a "professional message, an honest message."
Lender's-Eye View Lenders naturally want as much info as possible on subprime buyers. Denver-based Centrix Financial looks for "some stability," concentrating on the previous year, says vice president of dealer business development John Scordo. The company offers customer guidelines to dealers, such as limiting financing to the $10,000 to $30,000 range. If a "dealer is out of a guideline, it's a turndown," regardless of other factors.
Make sure buyers are who they say they are, Scordo adds. Check the list from the Office of Foreign Assets Control for identity theft. Request several forms of identification.
Nuvell Credit Corp., a wholly owned subsidiary of General Motors Acceptance Corp., "does not rely on credit bureau scores alone," says president Tom Pritchard. "We are looking for information that demonstrates a willingness and ability to pay existing accounts."
When you've found a finance source, make sure customers understand everything about the deal, contract, and financing. "It's in everybody's best interest to disclose fully," says John Haynes, president and CEO of HSBC Auto Finance, San Diego.
James M. Flammang is a freelance writer based in Chicago
| autoexecmag.com | | | AutoExec AUGUST 2005 |
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