Subprime Consumers: Making An Impact At Dealerships

Published September 2011

Following the economic downturn of the last few years, the American car-buyer has changed and the automotive industry is switching gears to keep pace. Gone are the days of free-swinging credit limits and prime financing for all. Gone are the days of "no credit, no problem." But also gone are the days of credit hoarding following the fall of the real estate market, when banks and lenders refused financing to even the most well-qualified applicants.

As post-recession reality sets in and the true car-buying environment takes shape, more and more consumers are finding themselves sorted into an unfamiliar category – subprime. But while some dealers and lenders may view this downgrade as a fall from grace, others see it as a cleverly disguised opportunity.

Working the Numbers

According to AT Kearney's 15th Annual Automotive Study, the recent recession is responsible for the creation of 15 million new subprime customers. Closer examination shows that approximately 530,000 of these customers would be locked out of the new vehicle market, based on current loan approval rates. But that's where opportunity presents itself, says Dan Cheng of Kearney's Automotive Practice. "Auto lenders who understand that lending has more nuance to it than a FICO score and are able to accurately size up credit risk in a lower FICO-score environment, will better avail themselves of the opportunity to help buyers finance new car purchases." According to Kearney's study, that could potentially translate into $3.2 billion of incremental sales for auto manufacturers.

Thankfully, deciding which customers can pay for their loans is much easier to determine than before, dealers say, in large part to the fallout from the economic crisis and the types of individuals now categorized as "subprime."

A Changing Demographic

Experts are quick to note that most subprime customers of today are typically not the same individuals labeled subprime of years' past. Warren Clarke of Edmunds.com noted that prior to the economic shake-up, a subprime label was "like a condemnation that will forever brand you as being somehow deficient to lenders." Clarke also notes that many subprime consumers at that time never knew they were considered subprime until they were in an F&I manager's office trying to get financing for a vehicle.

Nowadays, that's just not the case. Subprime demographics still vary widely based on factors such as location and the lenders involved, but on the whole, "These aren't the same folks as a few years ago," said Mike Helmstetter of Kingdom Chevrolet in Chicago.

Sales Manager Tafi Jaji, of Rick Hendrick Chevrolet in Atlanta, elaborated further. "In the past few years, we have seen a lot of people that once had great credit go through some tough times and are now just getting back on their feet," he said. Most of today's subprime customers are fully aware of their FICO scores and what that means in regards to buying a vehicle. As such, they're more inclined to bring along necessary documents, such as proof of residence or pay statements, to prove their financial status. "These customers are easy to deal with, especially when they find the rates and terms that they are able to qualify for," Jaji said. "For the most part, they gladly provide the documents that are requested of them."

Because of the financial struggles they've endured, these new subprime customers are often very smart consumers. They understand the loan process, its requirements and their own responsibilities. "They know what's going on," Helmstetter concluded.

Finding the Right Fit

Still, knowing you're considered subprime is not the same as accepting it. Many new subprime customers who were once prime still expect to be able to get a "good deal", just as they were able to do years ago. And that's where having the right programs and people comes into play.

Many dealers are taking advantage of subvention programs from lenders like GM Financial, to help customers get behind the wheel of a new vehicle at an attractive price. New subprime customers will sometimes arrive at a dealership expecting a battle over a used vehicle, and are pleasantly surprised at the offers and specials available to them for a new vehicle through GM Financial.

"People come in expecting a high interest rate, but we're able to give them the subvention rate on a new vehicle, and they're thrilled," said Helmstetter.

Jaji says customers often expect their rate to be close to 20 percent, and they're ecstatic to learn that they can get a rate in the low teens and sometimes below 10 percent. "It gives them the ability to shorten the trade cycle and peace of mind knowing that the car is going to be running smoothly during their ownership of the car."

In addition, the subvention program helps extend business, Helmstetter said. "The greatest flattery we get is when they bring back a friend or family member as a referral."

"The feedback we are getting from customers is truly the 'wow factor,' Jaji concluded. "They're impressed we were able to get them into cars at affordable rates, and feel we truly looked out for their best interests. Our sales team is constantly talking about the subvention program, and we stay excited because it makes the process a lot easier to sell more cars."