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Non-Prime and Prime Financing

January 2007, F&I and Showroom - Feature

by Ron Martin - Also by this author

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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