Subprime car buyers still can find credit

Even though credit is tight and captive finance companies are focused on prime customers, subprime customers still can find credit, say dealers, lenders and other financial experts.

Melinda Zabritski, director of automotive credit at Experian Automotive, says lenders are requiring larger down payments and shorter loan terms from all consumers -- especially those with subprime credit -- in an effort to manage the lenders' risk.

"It makes sense," Zabritski says. "As banks better manage that risk, it helps them offer better loan products to the general market."

John Cavanaugh, CFO of Automotive Credit Corp. in suburban Detroit, says many lenders have either reduced their subprime lending or pulled out of it altogether. But Cavanaugh's company is in it for the long haul.

In late September, Automotive Credit announced that it had secured a $50 million line of credit from Wells Fargo Preferred Capital, a subsidiary of Wells Fargo & Co.

Automotive Credit purchases the loans of auto buyers with credit scores of 500 and below. About 60 percent of its customers are franchised dealers.

"Our portfolio is performing well, and we continue to have good access to capital that allows us to grow our business and do what we've done successfully for a long time," Cavanaugh says.

Jonathan Neubauer, CEO of Vehicle Acceptance Corp., of Dallas, provides financial services for dealers who operate buy-here, pay-here operations.

Neubauer says his company provides dealers cash advances that, when coupled with a customer's down payment, can cover the dealer's investment in the vehicle. Vehicle Acceptance charges dealers a flat fee to service and collect loan payments.

A small number of the dealers that do business with the company also have new-car franchises, Neubauer says. "We're trying to get the word out that we are lending money," he says. "We are willing and able to lend money to buy-here, pay-here dealerships."

Experian Automotive's Zabritski says 12 percent of people who purchased vehicles in the first half of 2009 had subprime credit scores of 550 to 619, down from almost 15 percent in the first half of 2008.

She attributes the decline to a number of factors, including lenders that didn't provide financing or consumers who could not qualify for loans.

Consumers qualifying for deep subprime loans -- scores under 550 -- made up about 16 percent of vehicle buyers through June, up from 15 percent in the same period last year.

Anthony Stallworth, vice president of sales and marketing at Automotive Credit, says subprime financing works best when dealers provide customers the right vehicles. He says those vehicles typically are 2 to 7 years old, a domestic brand and in good condition.

"That is where the biggest amount of depreciation is already off the cost of the vehicle and allows our customer to get in at a reasonable payment," Stallworth says.

"If they do a good job putting the customer in a nice car and treat the customer right, we have a much better job of collecting."

Bill Perkins, owner of two Chevrolet dealerships and a Buick-Pontiac-GMC store in suburban Detroit, promises customers he will find them financing -- no matter their credit history -- with one caveat:

"They have to have $1,995 down; you can't buy a car without cash now," says Perkins, who sells about 140 used vehicles a month at his three dealerships. About 40 percent of the used vehicles he sells are to customers with subprime credit.

Tony Testo, subprime finance manager at Landers Automotive Group in Little Rock, Ark., which handles nine new-car franchises, says he works with five financial institutions to finance his subprime customers.

Testo says he spends an hour or more with each customer explaining that he can get them into a good 3- to 6-year-old vehicle, but they will have to pay higher interest rates because they are high-risk customers.

Testo also tells customers they need to have a down payment, typically $500 to $2,500.

Testo says he empathizes with customers who find themselves in a financial bind, but he wants them to be realistic about their vehicle purchase.

"Most of these people have been banged around, treated badly and told no over and over again," he says. "I tell them yes, but we have to do this together."