Ohio bad credit auto loan

C and D paper can earn a dealership extra profits through the secondary financial market.

To have a hope of employment, two things you need are a telephone - and a car. A telephone is fairly inexpensive to get, but unless you have lots of cash in the bank or good credit, a car, even an older used car, is out of reach. And if you are having employment problems, it's likely you have neither.

Today, more and more people find themselves in that situation. Study after study has shown that one of the keys to financial stability is marriage. It is simply a statistical fact that those who are married rarely see their incomes fall below the poverty line. Yet the 1990 census revealed that fully 25 percent of American households consist of just one person. That's up from 8 percent in 1940. This huge population pool invariably contains a large number of people struggling on the financial edge, and for whom a car is crucial to keeping a job, but who are least able to afford to buy one.

New car dealers have traditionally remained aloof from this market segment, abandoning it to independent used car dealers, many of whom have found enormous financial success providing financing in their "tote the note" or "buy here-pay here" lots to people turned away from the used car lots of franchised new car dealers.

But with new car sales sluggish and profit poor, and used car sales soaring and profit rich, new car dealers can't afford to ignore the profit potential of the financially marginal customer - especially since a number of companies now offer programs to help dealers maximize the potential of this market segment while reducing risk through secondary financing, which enables a dealer to sell off high-risk paper.

High risk, or C and D loans are those generated by what Steve Simon, chairman and CEO of AutoLend, a Miami Beach-based finance company, calls "the credit challenged." He says that a person who has to pay high interest rates in order to get a loan is not necessarily a high risk for default. "These are often professional people, people who have had a problem in their life - a job loss, divorce, death in the family - that puts a blemish on their credit rating. They're trying to rebuild their credit and get on with their lives."

Craig Johnson, vice president of marketing for National Auto Credit, Solon, Ohio, says C paper "applies to loans for people who, for the most part, are relatively good credit risks, but have had some credit problems in the past - slow pay, late on mortgage or rent payments." They may also be in low-wage jobs, be recent on the job or recent at their residence.

D paper applies to loans that are far riskier, Johnson says. These are people "who have had more serious credit problems, such as charge-offs, repossessions, liens, etc. These customers might have filed bankruptcy and have a less stable work and residence history." D paper used to be uncommon, but today's lifestyles, with easy credit and easy divorce, as well as frequent lay-offs and job loss have made it a growth market.

Monica Halbritter, group coordinator with the Scott-McRae Group, Automotive Management Services, Jacksonville, Fla., notes that defining C and D paper these days is increasingly hard to do. "The lines of which factors put a person on a different level is in a state of chaos now." As more and more finance sources go after this paper, each with their own definitions and standards, determining just what credit rating is correct for any customer becomes increasingly difficult.

A dealer acquires C and D paper, however it is defined, by letting the public know he wants this business. He has to build a reputation for providing this service, says Halbritter.

The easiest way to attract this business says Craig Johnson is by advertising "Poor credit? No credit? We can provide financing!"

The dealer should keep in mind, Johnson says, that he is not selling financing, but rather "providing financing for a customer who has made a decision to buy a car." The choice of vehicle the dealer can offer him depends on the same things that limit the choices of new car customers: the down payment he can pony up and the size monthly payment he can afford.

Once he has the paper, a dealer may opt to keep it. Especially if the dealership has its own finance company, the profits coming to the dealership from both the sale of the vehicle and its financing can be very good, indeed.

National Auto Credit's Johnson describes the profit potential as "enormous. It is estimated that between 40 percent and 50 percent of consumers shopping for a used car cannot obtain financing through traditional lending sources such as banks and credit unions. The sub-prime market is estimated to be in the $55 billion to $60 billion range annually."

By moving into this market, Johnson says, the new car dealer can increase the retail utilization of trade-ins and cars that might have previously been wholesaled.

But this option also exposes the dealer to very high risks. "We already know these customers are not managing their money well, and the cars are older and run higher risks of not living out the loan," says Scott-McRae's Halbritter. If the new job doesn't pan out, the customer can hop in the car you financed for him and disappear into the sunset. If the transmission craps out, he may just walk away from it - and the loan.

The dealer can minimize risks, Johnson says, by providing funding through a non-recourse program. "The key is providing a reliable vehicle. A customer will stop making payments when their car stops running." He adds that a warranty program or service contract can increase the likelihood of a note going to full term.

Financing a service contract as part of the sale may be a better way to increase profits while offering genuine value to the customer than merely trying to squeeze a higher down payment or bigger monthly payments out of him.

AutoLend's Steve Simon says a dealer should establish a "comfort zone" in selling a car to a person with poor credit. Get at least a 20 percent or $1,000 down payment, whichever is higher. A 17 percent interest rate, 29.4 percent APR, is reasonable. (Of course, interest rates are regulated by state, and this figure is only a rough ball-park estimate.) Don't pack the price, but maintain a responsible mark-up between wholesale and retail.

The key to success in this business, Simon says, is to recognize it is a loss management business. "Realize you will have a significant amount of slow payments and defaults. Keep in mind the rule: first loss, best loss. The first time you have a late payment, respond immediately. Be pro-active, not reactive, and don't loan to someone who doesn't meet the criteria you've established. They won't be any more responsible with you than with anyone else. Terms should be cast in concrete."

Monica Halbritter comments that note lots "have been around forever, and they are doing quite well." Clearly, there is a way to profitably manage the risk. She suggest a few simple rules that will help:

* Treat the customer with respect, and do right by him. (For example, don't push him into too much car, or try to squeeze too much money out of him.)

* Do not change financing practices. Keep the rules straight.

* Make good collections. Have firm closings, and never ignore a delinquent payment. Call no more than three days after a payment becomes late.

* Take the business seriously. Develop a plan and stick to it. Learn to head off problems by watching payment trends: "Watch the lump in the snake."

Dealers can also opt to sell their C and D sales contracts to finance companies. Recently, a number have become quite aggressive in moving into this market, realizing its growth potential and high profits. A company such as AutoLend purchases "unseasoned" individual installment contracts from a dealer after reviewing and approving the purchaser's credit application, and ensuring the contract meets the company's underwriting standards.

The company also purchases "bulk portfolios," portions of a dealer's existing "seasoned" installment contracts on either a one-time or ongoing basis.

There seems to be two schools of thought on whether financing C and D customers increases or decreases customer loyalty to the dealership, leading to sales of better used cars and ultimately new cars to the same customer once he has overcome his credit problems.

"There's is a much higher commitment to pay off the high risk loan," says Steve Simon. The customer appreciates the fact you placed your trust in him, understands why he has to pay higher rates, and if the car you sold him remains reliable, he has a high regard for your dealership.

"The person with perfect credit," says Simon," is more apt to shop the credit market in the first place," and has no particular loyalty to the dealership that delivers his car to him. "The person with poor credit shops the dealership - not the deal."