A Used Vehicle Challenge: Increasing Your Share Of Subprime Deals

In 2014, CarMax started using its own finance company to book deals from subprime customers, rather than work the deals through other lenders.

During a recent quarterly conference call, company executives say they haven’t seen “anything negative” from the in-house subprime financing test, and they expect it to continue as planned.

The CarMax effort is yet another sign of the growing importance for dealers to properly serve credit-challenged used vehicle customers. Industry analysts estimate as much as 30 percent of today’s used vehicle finance deals go to subprime buyers.

The key question for dealers: How well are you handling this important segment of the business?

As I talk with dealers, the answer I get to this question is usually some form of “we definitely could be doing better.”

Dealers who understand the subprime opportunity have already recognized the need, like CarMax, to align their stores with lenders who specialize in financing subprime deals. Beyond that, though, there are typically two larger challenges:

1. Acquiring the right subprime inventory for your market at the right price. Achieving this imperative means three things—identifying the exact vehicles that fit subprime lender criteria, recognizing an auction or trade-in vehicle’s subprime potential when you appraise it, and purchasing these cars sufficiently “back of book” to ensure lender approval and your profit margin.

2. Efficiently matching subprime customers and cars. Dealers estimate they may miss 15-25 deals a month due to either lacking the inventory for a subprime customer, or failing to get customers “bought” in the F&I office. Dealers will be able to solve the first problem by using technology and tools to incorporate an emphasis on subprime vehicles as part of their inventory acquisition and management strategy, as noted above.

I would also submit that dealers can address the problem of getting subprime deals “bought” in F&I by doing a better job matching subprime customers to the correct cars early on in the sales process. If sales associates had a list of subprime-eligible vehicles at hand as they discuss a potential purchase with a subprime customer, there would be fewer instances when F&I managers would not be able to book deals with lenders, far less frustration and more completed sales.

I recognize that many dealers have traditionally shied away from the subprime business due to these difficulties, as well as volatility among subprime lenders themselves.

However, as CarMax notes, lender behavior has been consistently “stable” since the market correction and the number of credit-challenged buyers represents a sizable, if not growing, segment of the used vehicle business.

One could argue that these conditions represent the “new normal” for retailing used cars and create an opportunity for dealers who seek to increase their share of retail sales in their local markets.