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Special Finance Types of Bad Credit
When it comes to special finance there are varying degrees of bad credit. Some people have Good-Bad Credit while others have Bad-Bad Credit.
If a car buyer’s credit problems can be associated with one significant economic disaster or event in the past they have Good-Bad Credit. Examples of Economic Disasters include Divorce, Sudden illness or injury, Loss of employment, or Bankruptcy due to business failure. Unless there is fresh bankruptcy, people with Good-Bad Credit normally have good credit items after their bad credit. For example, if they are paying on an open credit card account, have a car loan which is currently being paid, or have paid collection accounts.
If the prospect’s credit problems cannot be associated to one event and the person has a long history of credit abuse, or , the customer’s credit problems can be associated with a single event; however, that event is happening right now, they have Bad-Bad Credit. Examples of Bad-Bad Credit include people that are currently delinquent on all obligations, multiple bankruptcies, repossession that was not part of a bankruptcy, significant bad credit after bankruptcy, past due on child support, repossessions less than six (6) months old, dismissed bankruptcies, history of writing bad checks, recently entered a credit counseling program, or recently entered chapter 13 bankruptcy.
Another credit profile which has neither Good nor Bad-Bad Credit is the First Time Buyer. First Time Buyers have the largest lost ratios within the lending community and are often difficult to finance without a co-signer. These customers have a limited credit file and no previous auto credit.
To capture as much of the sub prime market as you can, you have to cater to the three credit types, Good-Bad Credit, Bad-Bad Credit and First Time Buyers. You’re probably already familiar with the Good-Bad Credit customer. Most stores have sold a few cars to this type of customer.
What about Bad-Bad Credit and the First Time Buyer. To cater to this segment you need to improve your lender and inventory mix.
Let’s now take a look at some generalities regarding the three credit types and how it plays into your role at the dealership.
First, let’s take a look the Good-Bad Credit Customer. These customers can be approved with little or no money down, they can buy brand new cars, and the fact is there are few differences between what your traditional customers can buy and what customers with Good-Bad Credit can buy. The main difference between Customers with Good Credit and Good-Bad Credit is the interest rate they will pay and the documentation they will need to close their loan, that’s it.
The biggest mistake, however, that you can make with Good-Bad Credit Customers is treating the deal as if it were a traditional deal, and following your traditional process. If you do this, not only will you reduce your average gross profit, you will spend additional time trying to close the deal, both with the lender and the customer, and you’ll often have to spend time selling a skinny deal to the dealership management.
If you’re unable to close the deal, you’ll have to move this Good-Bad Credit customer, often, at the 11th hour, from the vehicle they wanted, and are approved to buy, to something that fits within their budget. When this happens, you’ll often loose the deal and the customer will visit your competitor to buy something they can afford.
Now let’s take a look at Bad-Bad Credit and First Time Buyer credit types. Most lenders have a minimum required down payment for these credit types. Most likely the customer will have to come up with at least 1000 dollars in cash or trade. If cash is short, you can often over-allow the trade value to meet the minimum required down payment.
Vehicle selection is the major barrier with Bad-Bad Credit and First Time Buyers. With the right lender mix in place its easy enough to get a lender call for these credit types. They are often approved for loans in the 5 to 15 thousand dollar range. Once approved, if you have only one, or a few cars to show your customers with Bad-Bad Credit or First Time Buyers, they may decide to shop.
With Bad-Bad Credit and First Time Buyers you will have to build down payment and have ample inventory for the customer to choose from.
By quickly identifying the credit type of the customer, you will be able to move customers more quickly through the sales process, not only will it save time, but it will improve the overall experience and the customer’s perception of your store and the service you provide.
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