Non-Prime and Prime Financing

In 2005, CNW Marketing Research conducted a study that broke out the percentages of prime vs. nonprime. Of the $175 billion in financed vehicles, 40 percent were considered “A” paper and 23 percent were considered “B” paper. These categories would, by most accounts, represent prime finance customers. Experian represented a similar result in June 2006. It broke the numbers out like this: 61.12-percent prime, 15-percent nonprime, 14.49-percent subprime, and 9.38-percent below subprime. No matter how you divide it up, one thing is for certain: To be successful, the F&I department needs to be well versed in both prime and subprime.

Lending has evolved significantly in many respects. Our F&I departments are controlling most of the automobiles financed today. Credit scoring and tiered interest rates have allowed lenders to better manage their risks. The ability to charge higher interest rates for customers with marginal credit enables them to give their preferred customers better rates. The old system of everyone getting the same rate actually worked against both sides of the spectrum.

The tier system has allowed lenders to get much more aggressive in what we refer to today as special finance, subprime or nonprime financing. As a result, the new system has enabled customers with marginal credit to drive a vehicle financed by a bank instead of making a buy-here-pay-here purchase.

Are there differences between prime and nonprime customers during the buying process? Of course there are. The real question is how to handle this challenge. Not only is the buying process different, but the lending approval process also varies greatly. Since the lender’s guidelines are much more stringent with the nonprime customer, the dealership needs to be able to recognize these customers early on in the buying process. This difference in process leads to several different challenges. (See sidebar on page 34 for tips).

Selling: Prime vs. Subprime

With prime customers, you’re selling the vehicle, payment and interest rate. With subprime customers, you’re selling the financing. When a customer is purchasing a vehicle and has excellent credit, he or she is in complete control of the financing process. It’s likely that he or she could go directly to a bank and get similar terms and interest rates. In this scenario, the process will focus on the selection of the automobile, options, accessories and getting the customer competitive financing and leasing options.

When it comes to your subprime customers, the transaction becomes less focused on what they want and more on what they are actually qualified to purchase. Why? Allowing subprime customers to pick out the vehicle they want can lead to frustration — both for the customer and, ultimately, the dealer. This is especially true if the customer finds out later that he or she doesn’t qualify to purchase his or her preferred vehicle unless a significant down payment is made. A successful dealer is the one who is able to identify this customer early on in the selling process, which is before expectations must be changed.

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When Pay Plans Get in the Way

Many salespeople do not want to handle subprime customers because typical dealership pay plans pay salespeople more commission if the deal is approved by a prime lender rather than a subprime lender. This is attributed to two factors:

1. The lender reduces the advance on the automobile for the subprime customer.

2. The pay plan changes when the deal goes subprime.

The latter of the two creates a process problem for the dealership. With most pay plans for subprime, the salesperson has to share the gross profit with the special finance manager. With that in mind, salespeople want the regular F&I manager to try anything possible to get the deal approved via a conventional route to preserve their commission. Since the special finance department and prime F&I department are usually separate, the customer’s application can sit in finance for a couple of days while the F&I person tries to get the deal approved. When he or she finally gives up and turns it over to the special finance manager, oftentimes the customer has already purchased elsewhere. The dealership that has a process designed to handle this dilemma will have a much higher penetration of automobiles delivered.

Price Quoting: Prime vs. Nonprime

The process of quoting prices, payments, interest rates and terms is different for prime vs. subprime. Since interest rates can vary widely from an A- to a D-tier, the payments can quickly reach above the customer’s budget. That’s why it is imperative that the customer lands on the right vehicle from the start of the process. If the customer has taken mental ownership of a new $20k vehicle before learning they only qualify for a pre-owned $12k vehicle, there is a significant chance that no delivery will occur.

How a dealership manages both pricing and payment options (i.e., desking processes) will greatly affect sales penetration and customer satisfaction. When D-tier customers are quoted an A-tier rate — even if they take delivery — you can be sure they won’t be completely satisfied with their purchase. On the flip side, an A-rated customer may feel insulted if he or she is asked for a credit application before picking out an automobile. If you’re the dealer who doesn’t care whether the customer comes back, this probably won’t matter much. However, if your goal is to sell the customer and his or her family and friends more vehicles, you probably want to pay attention to the process.

Selling F&I Products

When an A- or B-tier deal is approved, there are usually few or no limitations on what can be added in regards to aftermarket F&I products. That’s not the case with credit-challenged customers. The typical subprime lender will limit aftermarket additions that the customer can add as part of the loan approval or qualification. In this case, the F&I manager is typically capped or limited to one or two products. This completely changes the F&I selling process, as it can make it much easier to step-sell. It can also change the way a menu is presented. This arrangement is also highly susceptible to “the bank approved it this way” explanations, which sets up a dealership for liability under payment packing.

Ron Martin is president of The Vision of F&I Inc., a national training and technology company. Ron has over 20 years of experience in F&I, auto lending, insurance and F&I consulting. E-mail Ron at [email protected].