Article

When Is Sub Prime Sub Prime?

August 2006, Auto Dealer Today - WebXclusive

by Becky Chernek - Also by this author

Does your F&I manager automatically ship the loans of sub prime customers away from your primary lender? What is the magic credit score number that triggers this policy . . . 620? Granted, there is a plethora of credit grantors available for those with shaky credit histories, but their services come with a steep and highly undesirable penalty for your customers; a penalty that may needlessly perpetuate their already troublesome credit rating and deprive you of repeat business. Perhaps taking the path of least resistance isn’t necessary. Perhaps simply shot gunning customers with lower than ideal credit scores to alternative banks isn’t the best policy after all.
Communicate with Your Primary Lender
When did you and your loan officers’ last meet with your primary banker to discuss their loan policy and guidelines? Do the loan officers of your primary lender recognize you and know your name? Do they know you are a loyal and committed business partner? Do they know you send all your car loans to their institution? That is . . . all but the sub prime loans of customers with less than ideal credit scores! Have you discussed whether they would be agreeable to accepting a percentage of those loans for only a slightly higher rate than the one received by customers with beacon scores? If not, why not? If your primary bank is taking all your customers who have the best credit, it only stands to reason they will take some who don’t fair as well, as long as you have an acceptable explanation and can justify why they should.

Here’s a reason why this policy of leniency should stimulate a new approach by both you and your primary lender. In a research study of sub prime loan policies in 2001, it was revealed that Household Finance Corporation, one of the largest sub prime bankers nationwide, serviced nearly $6.4 billion. That amount of auto loan receivables was double the amount they serviced in the preceding couple years. The study also revealed that the delinquency rates of their supposedly credit unworthy customers were significantly lower than expected. At Household, in particular, the delinquency quotients varied between a paltry 1.77 and 2.89 percent. This is amazing, considering the comparable percentage of delinquencies from the prime-rate lender General Motors Acceptance Corporation was 2.4 percent! What is the reason for this remarkable ratio, when the customers’ auto loan interest rates from Household were probably double or triple those given to more creditworthy customers from prime lenders? It’s worth an investigation of your own, isn’t it? If customers with lower than ideal credit scores are more likely to make their payments on time than customers with higher scores, is it possible you’re missing the boat of opportunity?

Communicate with Your Customers
Thousands of dollars each month are lost when your F&I managers don’t take the time to investigate why the credit numbers of certain customers are less than desirable. In order to convince your primary lender to buy the deals of less than ideal customers, they must do their job. They must talk to their customers. Why were the customers’ payments slow? Why were their payments less than the full amount due? Why are their credit scores less than 620? Is the reason a recent phenomena or a long-term problem? Perhaps credit is slow for certain customers, because they have just gone through a nasty divorce. Perhaps they have recently suffered a major medical crisis in the family, one that prevented them from paying their bills on time. Maybe their company lay off six hundred employees and it has taken them a few months to find another suitable job.

It is absolutely critical that your F&I officers learn the definitive reasons for the late payments shown on any potential customer’s credit report. This doesn’t mean they should send a sales person out to make a haphazard interrogation. They must get out of their office and meet the customers themselves. They must take whatever time is necessary to determine the reasons behind the late payments. When the reasons for slow pay are understandable, when the reasons are valid, when the customer is willing to discuss the credit score and can prove current employment, why not have the deal approved by your primary bank rather than a sub prime bank?

Sub prime banks are great, when customers need the opportunity to reestablish their credit history and a prime-rate lender will not buy their loans. That is the key: the prime-rate bank will not buy their loans. Your F&I officers know this . . . because they’ve tried. When a sub prime bank picks up the loans, instead of your primary bank, it can create even greater problems for your customers, because of the significantly higher monthly payments. If, on the other hand, the loans are serviced by your primary bank at only a slightly higher interest rate than that received by your more credit worthy customers, your chances of selling these customers another vehicle the second time out is far greater. You will have earned many new loyal and grateful customers who will spread the word about your helpful business practices . . . publicity that is worth its weight in gold. Cheap positive publicity that brings you even more customers is a goal worth pursuing.

Your New Rule of Thumb
Instead of scanning customers’ less than ideal credit reports for reasons to forward them to sub prime banks, your F&I officers should look for every possible reason to forward them to your primary lender. Your new rule of thumb for 2006 should be to never send a deal to any sub prime department, unless your primary bank has first taken a careful look, considered the volume of loans you send per month, and still denied the loan.

By working closely with your primary bank, your officers will earn more profits for your dealership in the long run. Although many sub prime financiers will allow the addition of products to the loan, most will cap the approval by way of either the advance or a payment call. Perhaps the only product your officers can offer customers is a service contract if that? That means, if your customers’ auto loans are approved for sub prime, they will not be able to secure their investments with additional product options. Generally, the dealer will loose the opportunity to earn reserve when the loan goes through a sub prime source. When the primary bank picks up the loan, the dealer will earn more profits in either reserve or product options sold. If your officers have done due diligence, met with their customers, explained the reasons for slow pay to your primary lender and they have still refused to buy the loan, only then should it be forwarded to your sub prime lender.

Don’t assume anything. Work to establish a strong and positive relationship with your primary lender. Know, in advance, what percentage of loans have been purchased by your primary bank and of those loans approved how many of them were approved with beacon scores less than 620? Don’t allow old business practices regarding slow pay credit reports to deprive you of the business of loyal and repeat customers who have suffered temporary setbacks. Don’t wait for callbacks from your primary lender, either. Get their loan officer on the phone and negotiate personally, while the customer is still in the showroom. Don’t tell your customers to go home and pick up their stips and come in at a later date, either. Although the stips are usually necessary, before obtaining final approval of a loan by a sub prime source, they may not be necessary if approval is received from your prime-rate bank source. F&I managers who wait around for several days to obtain bank approval lose customers. If a personal call to your primary buyer doesn’t close the deal, they should immediately submit it to a sub prime financier and strive for loan approval within the hour.

When is sub prime a sub prime policy? When your dealership considers only customer credit scores over 620 worthy of submission to your primary lender. Your customers lose heart and the opportunity to purchase a new or used vehicle. Your dealership loses a potential long-term customer and your primary bank source loses your loyalty. Remember, research statistics prove that customers with less than ideal credit scores are usually an excellent risk.

Vol 3, Issue 3

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