Customers with credit problems

The question is no longer whether or not dealers will do business with sub-prime customers; it's how to do it most profitably and at the lowest possible risk. According to Mitchell C. Kahn, CEO and president of Chicago-based First Merchants Acceptance, selling to sub-prime customers constitutes a $30 to $70 billion a year opportunity.

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"Customers with credit problems have always been out there," says Kahn, "and until recently they were not actively sought out by franchised car dealers - partly because the credit-impaired customer tends to be a used car customer, and used car operations were not the part of their business that dealers were most interested in. All that has changed now that leasing has put so many high-quality used cars on the market.

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"And a lot of ordinary people who used to have A or B credit have experienced hard times in the past five or ten years. But having gone through a bankruptcy no longer carries the stigma it used to, and I think that's one of the things that has changed our perception of the risks involved in dealing with people whose credit rating is less than perfect," says Kahn.

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Mel Ostrander, president of G.E. Capital Customized Auto Credit Services, also based in Chicago, points out that as many as two-thirds of adult Americans have suffered some sort of credit blemish and have fallen from an A or B credit rating down to the C or even D tier. But, he also observes, in the past five years, since major regional and national financial institutions have entered the sub-prime auto financing arena, this market segment now has provided enough performance history for lenders to study the data on how well the sub-prime buyer pays back his car loan.

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"In some parts of the country, dealers may still shy away from the C and D customer," says Ostrander. "But C or D buyers are no different from anyone else; they just need a little special treatment to help them get back on their feet and rebuild their credit."