Poor credit finance car

Byline: Cliff Banks

Think you know who the typical subprime customer is? No longer is it the person who has a history of not paying the bills, a.k.a. "the deadbeat."

Subprime is moving on up.

Even though it's a $228 billion market, only 30% of franchised dealers delve into the subprime arena, according to research by Leedom and Associates, a dealership training firm specializing in special finance.

Many dealers avoid handling the subprime customer because they consider them to be "bad people with bad credit" and hardly worth the risk.

Such people still are out there and their ranks are increasing. Financial and lending institutions want nothing to do with them.

In today's subprime world, though, the person who had a couple of BMW's in the garage six months ago may need special financing to purchase a car now.

It's reversals of fortunes in many contemporary subprime cases.

Jerry Coren, special finance manager for Bill Currie Ford in Tampa, FL notices a difference from a few years ago.

"A person with bad credit today can be someone who is respected and influential in the community," he says.

Consider the average customer profile for Americredit, the nation's largest automotive subprime company:

*Annual household income of $48,000 (national median is $42,000)

*Six years at the current job (national average is four years)

*40% are homeowners

*Six years at current residence.

Doesn't sound like the typical subprime customer, does it?

"We loan money to good people who have had bad things happen to them," says Mark Floyd, Americredit's president of dealer services.

More people are falling into that subprime category. Over 40% of Americans have some sort of credit problem today.

Ask the special finance managers at dealerships what's driving this dynamic and they'll say, "Divorce."

"In nine of 10 subprime deals that I handle, the customer is in that position because of divorce," says Bethany Sears, special finance manager for Heinrich Chevrolet in Lockport, NY.

Coren agrees. "Divorce is more common now - and that seems to be the biggest factor in destroying credit ratings."

He adds, "We also see more people who have started their own businesses but have failed - or others who have heavy credit card debt. They still have great-paying jobs but poor credit."

The past year has seen a huge growth in the number of unbankable customers in the marketplace, says Chris Leedom, president of Leedom and Associates.

"We're seeing a tremendous growth in bankruptcies," he says. "On a per-capita basis, there were more personal bankruptcies filed last year than in the Great Depression."

Because there are more people with credit problems, banks and lending institutions are more selective in which customers they fund.

That's making life difficult for the special finance managers in the dealership. For Sears, the toughest part of her job is getting the dealership customers approved for loans.

"There are 100 deals a month I can't do," she says.

Jim O'Donnell, business manager for La Riche Chevrolet Cadillac in Findlay, OH, agrees that getting deals funded is the tough part of the business.

"Years ago, the battle was making the sale, now half the battle is getting the customer financed," he says.

Many banks and financial institutions use the Beacon scoring system to determine which customers to fund. The system predicts whether a current or potential customer will become a serious credit risk.

The score is based on data in the borrower's credit report. Information such as payment history, outstanding debt and type of credit is considered.

Customers with low scores are considered to be high risks and fall into that "sub prime" or "special finance" category.

Just a few years ago, lending companies were tripping over themselves to provide financing to these customers. It was common to see customers with Beacon scores of 470 getting approved with no hassle for the dealer. A score of 600 placed a customer in the prime category.

Attracted by the promise of big earnings, financing companies and banks by the dozens entered the subprime market. Wall Street became enamored with the industry. Between 1992 and 1997, 35 companies went public.

"It was a run-and-gun atmosphere in the mid to late '90s," notes Jack Tracey, executive director of the National Automotive Finance Assn.

But the companies grew too fast and loose.

"They were poorly managed and bought paper from the dealers poorly in their haste to grow," says Charles Bradley, president and CEO of Consumer Portfolio Services.

Says Coren, "The range of 480-525 - what used to be the typical special finance Beacon range - the lenders don't want that business anymore.

"I think the lenders thought a few years ago that they could rehabilitate those customers. What they learned is, customers that didn't pay still don't pay."

Spurred by huge losses from customers defaulting on their loans, the lending companies tightened their credit standards and moved the level of Beacon scores they funded to a higher level.

The trend upward continues. Lending companies are sending letters telling dealers that they don't want to see customers with Beacon scores below the 540 line. "That number could hit 560-575 in the next year," Leedom predicts.

"The odds are better that these people will be able to repair their credit as opposed to those whose Beacon scores are much lower," says Coren.

The customers that fall below that 540 level are getting pushed down to the buy here-pay here independent dealers.

There are some banks, though - mostly local - that sometimes fund those less attractive deals. They typically charge rates much higher than buy here-pay here operations.

Sears says a recent customer had a sub-500 Beacon score.

"I have a bank that will fund the deal, but they practically draw blood to do it," says Sears. Instead, she sent the customer to a buy here-pay here store Heinrich Chevrolet owns.

How does a special finance manager cope with all of the changes?

"Work harder," says Leedom. Increase the pool of customers and applications with advertising.

Dealers can do other things dealers to make subprime work for all concerned.

First, recognize that there is a more sophisticated subprime customer coming into the store these days.

More franchised dealers are getting involved in subprime, giving the customer more places to shop. Gone are the days when "you could slap the customer around some," as one industry player puts it.

"We have to recognize the market is getting bigger and that there is more competition. The customers are more sophisticated," says O'Donnell, whose own dealership got into the subprime business six years ago.

Ryan Miller, his special finance director, says, "You've got to kill the customer with kindness. We have five dealerships in a close geographic area that now do subprime."

Training the entire sales staff to recognize a subprime customer can improve customer satisfaction.

Says Coren, "I try to educate the sales staff to recognize the subprime deals. Instead of sending deals through to Ford Credit they know will be denied, I can take it and get the customer funded."

Vehicle selection is another changing area. Today's average subprime customer is making more money and can afford a more expensive vehicle.

Coren says, "It wasn't too long ago (in the last 10 years) that the special finance customer was buying $7,000-8,000 vehicles. Now I have some who are buying Expeditions because the salaries are so good.

"Mostly, the range is $10,000-$13,000. I get my used car manager to buy as many Isuzus, Blazers and 2-door Explorers as possible."

Miller agrees. "I tell my used car manager to buy as many Blazers as possible. Right now, $15,000-$17,000 is our average. A few years ago, it was $8,000-$11,000."