Subprime time

Dealership finance director Valerie Weddermann knew that if she wanted to make the most of expanding opportunities in subprime, she needed to dedicate one person to the task.

She came to that determination after a year and a half of struggles, she says. Without a specialist devoted to subprime, the dealership, Rosner Toyota of Stafford in Stafford, Va., missed sales. A credit-challenged shopper coming to the store typically would start with a salesperson and then be turned over to a finance manager more accustomed to handling prime customers.

The result? All too often, the deal would be turned down by the lender receiving the loan application, and the customer would walk out the door with no car. Having an expert who is persuasive with shoppers and knows the ins and outs of lenders' subprime programs would change that outcome for the better, Weddermann says.

"There are people who say, 'I know [which lender] will do this,' and we have not been equipped with that," Weddermann says. "Nor have we been equipped with the volume. It's so difficult if you don't have the volume to get anyone to help you, to do you a favor."

But the opportunities are ripe.

Lenders are increasingly saying yes to credit-challenged customers. During the first quarter of 2012, vehicle loans to subprime borrowers increased by 11 percent, according to Experian Automotive. Nearly two-thirds of respondents to an unscientific Automotive News survey said their subprime business has increased in the past year.

Tracey: Big customer pool

"If a dealer is not in the nonprime automotive financing space today, they should be," says Jack Tracey, executive director of the National Automotive Finance Association, a trade group representing finance companies.

Funding for subprime loans has improved dramatically in the past 18 months, Tracey says. Big lenders who pulled out during the recession are back in the market with a vengeance.

Dealerships have more lenders to choose from, more competitive terms, lower interest rates and less stringent underwriting to deal with, he says. And the pool of potential customers is big.

Weddermann's market is no exception. Though Stafford is an affluent area, many residents suffered job losses and foreclosures during the recession, she says. A lot have steady income again, but their credit scores have suffered. Too, the dealership is near Marine Corps Base Quantico and a population of young Marines with limited credit histories or blemishes on their records.

Rosner Toyota of Stafford will be better able to capture their business going forward, anticipates Weddermann, a 24-year veteran in dealership finance. In June, she hired Michael Jordan, a former colleague and eight-year sales veteran, to launch the dealership's special finance department. It will mostly handle used vehicles, but some subprime buyers qualify for new vehicles.

Valerie Weddermann hired Michael Jordan in June to set up a special finance unit at her Virginia store. And she’s starting to see traction, she says. “We’re getting people in the door that we didn’t before.”

Jordan is learning the finance end of the business. He already has the ability to direct customers without turning them off, Weddermann says. That's important in special finance because shoppers many times have to be steered toward a vehicle that's easier to finance.

He also is building relationships with lenders. The dealership has added three finance companies to its roster. Jordan is tasked with getting more leads in the door and handling most of the sales and financing process.

Though it's too early to report numbers, Weddermann says, she saw traction in August.

"There were certainly people going by the wayside before," she says. "We're getting people in the door that we didn't before."

Other dealers and finance directors are seeking the same upside. In the Automotive News survey, nearly one-third of respondents said they have a special finance department or are considering starting one.

In June, Galpin Motors, a five-store group in suburban Los Angeles, launched a subprime unit on its used-vehicle lot, across the street from its huge Ford store. Galpin had closed a previous special finance department before the recession, but now specializing in credit-challenged customers makes sense again, says Andy Graff, Galpin vice president of sales.

"The cars were available, the lenders were there, consumer confidence was there," Graff says. "All the things came together for us."

The Galpin unit has one full-time person selling about 20 used vehicles a month.

Ultimately, the Galpin unit probably could sell 80 to 100 used vehicles a month, Graff says, but competition for used vehicles at auction has limited inventory. He's aiming for 50 to 75 used cars a month by next summer.

Tracey says dealers should be cautiously optimistic about the next 12 months. With so much competition for loans, lenders loosen underwriting standards, he says. That means a downturn may happen faster than in past cycles.

"A year from now, the portfolios may not be behaving as well as they'd like, and the institutions may say, 'We're going to back off a little bit on growth,''' Tracey says.

Dealers should get a good lineup of lenders now, so they have options if some back away.

Know as much about those lenders' preferences as possible, says Rob Hagen, a Louisiana-based subprime consultant to dealerships. He has worked in special finance departments selling anywhere from 25 to 250 cars a month.

Knowing lenders' preferences increases the chance of completing the deal. It also helps a finance manager determine which lender to try first for the maximum potential gross on the sale, Hagen says. Despite the auction competition, dealerships also should work to line up additional used vehicles, aiming for the $12,000 to $15,000 subprime sweet spot.

Some dealerships aren't quite ready to carve out a separate department. That describes Brown's Ford of Johnstown, N.Y.

Business Manager Joe Papa worked in the dealership's special finance unit in 2005 and '06 before it disbanded as the economy slowed. While there has been a "tremendous uptick" in the store's subprime business the past six months, Papa himself wants to handle mainly prime customers.

But the store would consider a separate unit if it found the right person to lead it, Papa says. The ideal person is someone skilled in interviewing customers, matching them with cars -- likely used -- and then structuring the deals, he says.

"With the subprime customer, you do it backward," Papa says. "You put them in a car rather than have them pick out a car. Ninety-nine times out of 100, they'll pick out a vehicle they will not qualify for."

Papa uses software that uses credit scores to sort in-stock vehicles likely to qualify for loan approval. Then he shows a subprime customer the top three cars recommended. It's a big timesaver.

Hagen says technology can help any dealership evaluating whether to start a subprime unit. A dealership can use its customer relationship management software to compare closing ratios across bands of credit scores to determine whether it's missing out on business.

A dealership should close about 20 percent of potential deals, Hagen says. So if the store is getting a very high close ratio, say, 24 percent, on the prime credit score band of 700-plus but a very low close ratio, say, 4 percent, on the subprime credit score band of 599 and below, there's a lot of potential in the subprime space that the store is failing to capitalize on.

Hagen says any dealership has the potential for 25 subprime deals a month.

"But those deals have to be helped a little bit," Hagen said. "It may take having a small advertising budget to buy leads or having a credit microsite to get those deals to come through the doors."

Rosner Toyota of Stafford has been doing 10 to 13 subprime deals a month, mostly used vehicles, Weddermann says.

She projects the store can get into the 30s and eventually work toward 50 a month.

Subprime buyers generally are loyal to the dealership that helped put them behind the wheel, finance managers say. They often send referrals the dealership's way.

Says Galpin's Graff: "This is the first step to a lifelong relationship with the customer."