Tapping into the non-prime market

The automotive non-prime market is ripe for the taking, but dealers intent on benefiting from it will need a solid process and the help of a lender to ensure the greatest chance for success.

Non-prime car buyers represent relatively untapped potential for Canadian automotive dealers. But the right strategy, process, and lender can help them leverage this market for their business.

In the year 2000, two-thirds of the driving population owned a vehicle, according to Dennis DesRosiers, President of DesRosiers Automotive Consultants. Last year, that number jumped to 87 per cent, which is equivalent to adding 10 million more vehicles on the road.

In an interview with Canadian auto dealer, DesRosiers said the increase in vehicle ownership is directly related to the rise in non-prime car buyers.

“As more and more consumers have been embracing vehicle ownership, it is the bottom quartile of the economy (75-87 per cent) that’s doing it, and those are the ones with credit score issues. That’s why it’s hot, and easily one of the fastest growing parts of the finance sector today,” he said.

These consumers, who have a FICO or Beacon credit score below 670, are generally not able to get traditional financing to purchase a vehicle. They have no choice but to take a subprime loan — which also comes with a higher interest rate than most banks. But consumers with few or no options have to take it since, as is often the case, they need a car to commute to their job.

They can turn to a private lender, but they are more likely to go to the dominant players in Canada — the Schedule A banks (National Bank of Canada, Royal Bank, Toronto Dominion Bank (TD), etc.), who are particularly disciplined with their credit and money practices.

“That’s one of the reasons dealers are embracing subprime. Throw in a difficult economy that we are heading into, and a smart dealer should go there,” said DesRosiers.

The non-prime situation

Canadian debt continues to rise, with Equifax Canada reporting that consumer delinquencies have “started their modest turn higher in the last quarter of 2018.” Total consumer debt (including mortgages) increased to $1.906 trillion in Q4 — up from $1.821 trillion in Q4 2017, representing a 4.6 per cent increase.

During the same period, the average consumer balance for auto loans jumped to $21,161 in Q4 2018 from $20,801 in Q4 2017, according to a TransUnion report. That’s a yearly percentage change of 1.73 per cent, which is less than most other categories, including mortgages.

But there is an opportunity for consumers and for dealers in this increasing debt situation. At least, that’s how Joe Carusella, Vice President of Sales at Fairstone Auto views it.

“After one’s house, the second item that most people will try to avoid losing is their car. They need their car to get to work, run errands, shuttle the family about and so forth,” said Carusella. “The easiest way for a credit challenged client to rebuild is through a car loan. Small amounts that you can repay diligently also help the client rebuild their credit score while managing within their budgets…and importantly, retaining their car for use.”

In March 2019, data analyst company FICO released highlights from its 2019 Canadian Consumer Survey of Vehicle Finance Perceptions, revealing that 66 per cent of Canadians sought financing directly from the dealership. This is compared to
the global average of 56 per cent.

The fact that a growing number of consumers have shown interest in connecting with the dealership for their financing needs represents yet another opportunity for both parties. But for those dealers still weighing out the benefits of offering such a service to non-prime clients, remember: these consumers are still credit worthy.

“Sending them to lenders that recognize this and will work with them to help them rebuild their credit history is an added advantage that dealers can provide clients who do business with them,” said Carusella. “Over time, with the right lender, that client has an opportunity to rebuild their credit score and become a return customer for a dealership.”

Leveraging a non-prime strategy

It’s also a big market opportunity, since 30 per cent of the Canadian market can’t get bank or OEM financing approval because their beacon score or credit is not high enough.

Doug Decksheimer, Vice President & CMO, Rifco National Auto Finance said that dealers seeking to leveraging a non-prime strategy for their business will need to make some changes — starting right at the top. “If the non-prime experience is done correctly, it doesn’t feel like a loan.”

Years ago, the general consensus was that non-prime car buyers represented less profitable deals, and that these customers could only afford less-than-ideal vehicles — or in Decksheimer’s words: “crap cars.” In some cases these people would be serviced in the trailer at the back of the dealership, which, needless to say, their experience was well below that of those customers that could afford better.

“Everything needs to start at the top of an organization. Is the top of the organization committed to it? In some cases, you can go at it very slowly and potentially advertise through your website,” said Decksheimer. “Are you willing to spend some money to let your sphere of influence with your dealership let them know you are open to helping people with not perfect credit?”

Non-prime consumers may not visit your dealership if it’s not clear that credit can be offered to them. But when it is clear, Decksheimer said salespeople need to understand their customer’s needs, and pre-quality them in advance instead of having them wait and drive a vehicle that may be worth $60,000, “only to risk having the business office tell them they can’t get approved for it.”

For this reason, many consumers feel more comfortable applying online via a website that prompts them to receive pre-approval for a loan. In some cases they may not know where they are applying to, but Decksheimer said they are willing to choose this option rather than risk going into a dealership and not being approved.

A good approach, he advises, is to have your salespeople ask their customers specific questions: “Have you ever had any reason to not think that you have good credit?” or “Is there anything in your life that might get between you and a bank not approving you?”

“This is where your dealer needs to be engaged at the front end of the process. It’s really about having a plan about how you want to engage your customers, how you want to make sure your customers can find you,” said Decksheimer. “You can be involved as little as being available and getting some incremental business, or you can say, ‘let me jump into this and make it 10-15 per cent of our business with some investment.’”

Leveraging lender experience

Some dealers may want to go at it alone, offering financing without the help of a lender. But that may not be the most ideal option for their business.

Darcelle Valade, National Sales Director at AutoCapital Canada, has been in the business since 1999. In her experience, she has not seen a significant amount of success with dealerships that are doing this, simply because of the “many moving parts” involved in making a successful non-prime department.

“Unless they onboarded an employee that currently left a successful running machine and can bring in fresh ideas and understand the processes and what needs to change, the dealership could be in for an uphill battle in achieving optimal success,” said Valade.

She said there are several factors to consider, and advises dealers looking to improve their efficiency (with this demographic) and increase the amount of traffic walking into their showroom to ensure they have three things in place: a solid internal process, a defined marketing budget, and to advocate support from their lending partners.

“By defined process, we mean the process of how your lenders can share best practices of what works and what doesn’t, as far as qualifying the customer as soon as they walk in the door, to ensuring they’ve got proper inventory, to helping the business managers on how to sell higher interest rates, and even teaching business managers how to read a credit bureau,” said Valade.

Dealers that use their lender rep, she said, can benefit from or receive advise on how non-prime friendly their current inventory is, how to structure a non-prime deal to maximize profits, and how to close a deal at a non-prime interest rate. Lenders may also share profit ideas that they believe will work across the nation.

The non-prime customer

Earlier we touched on how non-prime consumers are not always in the market because of credit issues.

According to Galen Gower, Vice President, Business Development, Carfinco, there are roughly eight attributes that can position a customer in a higher rate than prime, including time on job, income levels, and a need for second units.

“These consumers can have a high level of credit, but still have risk factors that in at least the short term require non-prime lending,” said Gower.

He said there are many statistics available on the size of the non-prime market in Canada, which can range from 25-60 per cent of total consumers depending on how they are classified.

The stats may not appear consistent, but dealers can find their own consistency in this market if they are looking to grow and create a loyal customer base that will stick with the brand through their lifecycle.

“Then non-prime, even at the low end of 25 per cent, represents your highest opportunity,” said Gower. “Small changes in how your dealership handles these consumers can create large results in your overall profitability.”

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