Special Finance is the fastest growing segment in the automotive financing market
Until very recently, the term “sub-prime” was essentially unknown outside the circle of lenders and dealers or brokers involved in the financing business. Even many of the customers who benefited from  sub-prime loans probably did not recognize them by that name. But things have changed. The term has now gained front-page status, albeit with a somewhat negative connotation, as a result of its association with the collapsing housing market in the U.S.A.

That negative image is both unfortunate and misleading, however. “Special Finance,” which includes sub-prime financing, is an integral and significant part of the automotive financing business, and any dealer not taking advantage of it is leaving sizeable sums of money on the table. Many dealerships have now recognized that customers with poor credit are not necessarily bad customers, and that they represent a very lucrative market.

Understanding the terminology
Automotive financing sources in Canada now offer a broad range of credit products geared to risk. But understanding the mix of terms and characteristics applied to those products can be confusing and frustrating when trying to find the best fit for your customers.

The term Special Finance encompasses all credit groups other than prime, and credit products available through Special Finance companies usually offer tiered pricing programs, risk-adjusted for customers with varied credit histories. Sub-sets within the Special Finance market include non-prime and sub-prime customers, which are progressively higher risks than the near-prime customer.

Years ago, difficult access to sub-prime financing was a deterrent to dealers’ involvement with such business, but that is no longer the case. Several prominent lenders, including AmeriCredit Canada, HSBC, Travelers, VFC, and Wells Fargo provide ready access to such loans, right on your computer screen.

The market is huge, but different
According to VFC, from 20 to 30 percent of Canadian consumers do not meet conventional bank credit requirements. Based on 1.7 million new-vehicle sales and 2.5 million used-vehicle sales annually in Canada, that means that over 800,000 units are being purchased by non-bank customers. Furthermore, that number is rising as consumer bankruptcies, divorces, and layoffs increase, and prime lenders tighten their credit criteria.

Taking advantage of this opportunity gives dealers access to both a broader and a growing base of consumers. But it is important to recognize that it is a different market that requires a different approach in both attracting and selling to these consumers. It is worth taking the time and making the effort to understand those differences – a task with which any of the aforementioned providers can readily assist.

According to interviews with dealers, conducted by VFC, customers approach vehicle purchases with distinctly different behaviours, depending on their credit position, which necessitates correspondingly different sales processes, as follows:

The “Vehicle Sale” –
Mainstream bank customers typically look at consumer reports, “for sale” publications, the Internet, and other media, when looking to buy a vehicle. Their purchase process and sales experience is focused on the vehicle and their ability to obtain financing is generally not an issue.

The non-bank customer shopping via this sales process is usually considered a near-prime customer, and has the mindset of a bank customer. Keeping the credit process similar to a prime borrowing experience is very important and the interest rate should be close to prime.

A near-prime turndown becomes difficult to close in this process as it often involves a higher rate than the customer anticipated and can sometimes involve switching vehicles.

The “Credit Sale” –
This customer is typically concerned with monthly payments and getting approval, and that process takes precedence over selecting the vehicle itself. Both non-prime and sub-prime customers are best handled using the credit sale. They are typically driven to dealerships through advertising that acknowledges people with poor credit and offers financial sources for them. In may cases these customers have already experienced problems with the “Vehicle Sale” process and have identified themselves as non-bank customers.

Understanding the different sales processes and the non-bank credit products available gives you the ability to find the best fit for your customers. Typically franchise dealerships have catered to the Vehicle Sale process but a growing number are opening Special Finance departments that focus on the Credit Sale in order to attract and increase sales from the diverse credit groups shopping in today’s market. With that infrastructure in place you can then target your advertising to those customers.

How it works
Having obtained all the relevant information from the customer, a dealer can originate transactions over one of several web-enabled finance portals to access the auto finance programs offered by Special Finance lenders. Applications are typically credit-adjudicated within minutes, with approvals returned via the finance portals. Documents can then be printed and executed by the customer without ever leaving the dealership environment.

That ability to close the deal almost instantly is a major benefit of today’s streamlined financing processes. The speed at which you can put a deal together will often determine whether or not a sale will close.
Once a customer has decided on a vehicle, the opportunity to take it home immediately is an exciting option that he or she was probably not expecting. That fact alone can often alleviate small doubts the customer may be experiencing. The “if I could… would you” closing technique works well in this situation and could keep you from losing a customer.

One of the most common reasons non-prime customers do not close after being approved is that, once they realize that financing options are available to them, they become “shoppers.” If that happens, there is a good chance they will be talked out of the purchase by a friend or spouse, or find a better deal somewhere else.
The ability to provide “spot deliveries” – deliveries that occur on the same day as the customer’s first visit to the dealership –  typically helps lead to higher closing percentages and bottom-line profits, but there is an associated risk. It is essential that business managers have a thorough understanding of all your non-prime lender’s requirements and processes.

Business managers must be diligent in verifying proof of income. Lenders usually require a current pay stub, and have specific income requirements that need to meet debt service ratio guidelines. Placing a quick call to the customer’s employer to confirm current employment, and requesting a copy of the previous year’s T4 are additional steps that can to limit your risks. It is important for all parties, including the customer, the payments remain affordable and within the lender’s program guidelines.

No matter how careful you are, you cannot be infallible. There may be information you could not have known at the time of delivery, based on what the customer gave you, and in some cases you may have to request that the customer return the vehicle. This possibility should be addressed with the customer before delivery to prepare him or her for potential problems.

The bottom line
The Special Finance market is simply too big for most dealers to ignore. But it is a different market, with a different customer and a whole host of potential pit-falls. It must be learned and approached with the full knowledge of how it works and how to minimize any associated risks. If you do that, and ensure that your front-line personnel are fully trained in the nuances of that business, you will almost certainly enhance the results on your bottom line.