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
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."