Entitlement or Priviledge?

I am consistently amazed at customers who come in thinking that, despite the fact that their last vehicle was just repo'd, they want to get another loan without putting any money down. It seems that these customer believe that credit is a right, or entitlement, and that regardless of their past credit history, or lack thereof, they shouldn't have to put any money down in order to get a loan.

Well, I've done some research on this matter, and to no one's surprise, the Founding Fathers were very explicit on the rights we bestow on our citizens. Freedom of speech, religion, assembly and such were all spelled out very clearly. But no where in the Constitution could I find a reference to the right to "buy now and pay later".

I tend to believe that credit is a relatively new concept. Folks in colonial America may have had credit arrangements, but they were more likely than not between merchants and customers that knew each other first hand. Long relationships had already been established, and credit, as it was, was limited in depth and term. Small amounts for short terms, until the harvest, or the sale of a horse, or some other transaction would occur, to make good on the debt incurred. It made sense, since there was little mobility in those days, and it wasn't hard to find someone who owed you money. You rode out to their farm and asked for repayment, whether it be cash or collateral didn't matter.

Today, banks lend at more than an arms length from a customer. Few, if any of our customer actually meet the people who are loaning them the money, and so lenders look for some commitment on the part of these customers with regard to the loan. There is no "right" to credit, it is really a privilege that must be earned. Stability and ability are fine attributes in an applicant for a loan, but far too many lenders learned the hard way that, simply because a customer looks like they can afford the payment, that doesn't necessarily mean that they WILL pay them. A commitment to or "customer participation" in the loan won't insure that the payments will be made, but at least the lender knows the customer has a stake in the game. I often tell my customers that their credit challenges can be overcome with a significant commitment on their part to the transaction.

The lack of a satisfactory payment history shouldn't preclude a customer from getting a loan, it just means that they have to prove that they will actually make the payments. For too many years, auto credit was a three strike deal - regular finance, special finance, and last but not least, buy here pay here. Customers knew that they could simply stop paying on their current loan and go down the street and get another car with little problem. Lenders were flush with cash and eager to over extend credit to folks who shouldn't have gotten it. Now we all are paying the price.

There is now guaranteed right to credit. Maybe I need to right the "Credit Challenged Bill of Rights"? Kind of like the Miranda rights you hear on all those cop shows and movies. Hmmm...

What's Does It Take To Be Successful In Subprime?

Yes, it's still about the relationships your dealelrship and you have with your lenders, but the lenders are getting much more cautious with their approvals. More lenders are doing upfront verifications, and even prime lenders are verifying income on some deals. Lenders are looking more closely at DTI issues, and most payments have gone from 20% PTI to 12-15%. Huge advances are also a thing of the past; I haven't seen an approval from a subprime lender over 115% since I've been back here. 110% seems to be the magic number, and even Drive, when they give a 115% advance eat it up in their fee.

I talk to my buyers only when I have something to bring to the deal, or to make sure they have all the correct information to make their decision. Many times, Dealer Track may not transmit all the income info correctly, especially on 2nd income or part time jobs.

My secret has always been to send a lender a deal they can buy. Good business is good for everyone..good for the bank, in that they can collect the loan. Good for the dealership so we sell a unit and make a profit, and good for the customer to get a vehicle they want AND can afford. The days of stuffing a customer into a deal for huge gross profits is a "once upon a time" or "remember when" deal. If I can make $2000 profit, I'm a happy camper. I only wish I could get the huge advances with all the back end products we used to get. But by sending an application structured to the lenders guidelines, I get most of my deals approved first time out. Rehash when I need to, but I don't waste the buyer's time on an unrealistic structure and expectation.

I also maximize my relations by telling the lenders upfront about problems or obstacles they might encounter when it comes to funding a deal. Cell phone bills, landlord verifications, anything that might be a problem for them is expressed upfront so there's no surprise on either end at funding.

Full spectrum lenders? A figment of your imagination, like unicorns or the Loch Ness Monster! No one is buying the "full" range of customers. The only lender I have digging deep is S.E. Toyota, and only on Toyota products. First time buyer programs have pretty much evaporated, with Drive and Summit doing these deals, but with limited advances and payments. Many lenders have increased their minimum criteria, raising income to $1600 or more, minimum 1 year on the job, minimum down payments, etc. "No money down" deals followed the unicorns out of town!

I spend time talking to my buyers and reps about their programs, and what they are looking for, not what I want. I have all the 560 and up lenders I need, the problem is the customer demographics here are way below that. My average FICO score falls below 520, with mid to high 400's the rule rather than the exception.

Foreclosure is a big problem here, and most of my lenders won't approve a customer in foreclosure. Once the foreclosure is over, however, it's open season, and I have some lenders giving decent approvals to these customers. Lately, I've seen a bunch of customers with multiple foreclosures - investors who got in way over their heads and can't get out from under now. Many of these customers knew they have credit problems, but still think they can negotiate the terms of the loans. Many leaved pissed off, only to come back a day or two later, after they realize I was honest with them, but other lenders have already sent the applications everywhere, and it's getting harder and harder to turn a decline around.

I have been talking to many deep lenders, trying to find other sources, but many have limited recourse (first 3 payments or first payment default). I had a few lenders who want us to pay them an upfront fee to sign up with them, and many of the dealer agreements I've looked at appear to be written by Chinese lawyers (lots of print that you can understand).