How Securing A Vehicle In Subprime Is Changing Lives


How Securing a Vehicle in Subprime is Changing Lives

An auto loan directly impacts two very important factors of your credit score — payment history and credit mix.

This post originally appeared on Auto Refinancing Wednesday, Jul. 27, 2016

As a non-profit financial counseling organization, our counselors see first-hand the impact a car and a car loan have on the financial security of individuals and their families. The value of a reliable car is pretty clear. It expands employment opportunities, since you're not limited to the reach of public transportation and it gives individuals more flexibility to meet work demands, which increases their value as an employee.  In addition, owning a car often shortens the length of a commute, freeing up time to spend at home and improving the quality of life for the whole family.

Often overlooked is how important the car loan can be for improving an individual's financial future. An auto loan directly impacts two very important factors of your credit score — payment history and credit mix. Payment history is the most important factor, as it makes up 30 percent of a person's credit score. Consistently making on-time monthly payments positively impacts your credit score, whereas, one missed or delinquent payment can cause a credit score to drop significantly and remain negatively impacted for years.

 As for credit mix, successfully managing various types of credit products strengthens a credit score.  A borrower who has paid off an auto loan and responsibly managed a few revolving credit lines will be considered a much better credit risk than someone who's simply juggled a handful of credit cards. And since a credit score affects lending terms, insurance premiums and in some cases, employment eligibility, maintaining a strong credit score is essential for building financial security.

In an industry where sales quotas and loan approvals are so important, it can be easy to lose sight of the tremendous impact you are having on the lives of your consumers. The impact is especially great for a less than prime borrower.

 For them, the car purchase can set them on a path towards financial security or deepen their financial struggles. If they make the right decision, they'll have reliable transportation, with a loan that's strengthening their credit history with each successive on-time monthly payment. Make the wrong decision and their stuck with a fixed expense that restricts their ability to save money for emergencies or meet household and living expenses.

At its worst, a bad car buying decision can lead to mounting credit card debt, delinquent payments, car repossession and, in some cases, bankruptcy.

Recognize and embrace the opportunity to impact a life

I have bought quite a few cars in my life and, although I've worked with some great salesmen, not one of them ever seemed concerned about how the car payment was going to affect my budget. In fact, even though I always go into a dealership with a very specific monthly payment in mind, the entire sales process seems like a battle to stay within my targeted number. For me, and most prime borrowers, the extra $25 or $50 dollars a month will not have a huge impact on my life, but for the nonprime and subprime borrowers, the difference can be devastating. What a borrower can qualify for is not the same as what they can really afford.

Once you learn that a client has had some challenges with their credit, recognize that, as a sales consultant, you're in a position to have a very positive or negative effect on your client's life. For most credit challenged borrowers, the small numbers matter. It can mean the difference between being able to set aside a few dollars in savings each month to handle unexpected expenses or, living paycheck to paycheck whereby the slightest hiccup will set off a series of missed payments, late fees and further damage to a credit score.

For these clients, consider starting the sales process off with the financials. Help the client determine a solid monthly payment that will fit into their budget and then find the best reliable car for that price. Set your client up for success from the start and you'll have a client for life. The ideal scenario for the lender, borrower and dealership is that the client buys a reliable car at a fair price, with affordable monthly payments that they're able to pay for the life of the loan.

Who should have this financial conversation?

Option No. 1: Train someone within the dealership to discuss budgeting, goal setting and credit management.

Option No. 2: Partner with a reputable, nonprofit credit counseling agency who you can work with your agency to build counseling into your sales process.

Credit unions are already doing it

Credit unions are already using car loans as credit-building loans.  To improve the chances that a borrower will successfully repay their loan, they require the consumer to fulfill certain financial literacy and education requirements in addition to meeting their underwriting standards.  It may seem like an additional step that gets in the way of a sale, but the extra time is well worth it if it helps reduce repossessions, strengthen repayment rates and build customer loyalty.

How to implement this new step without hurting sales

1. Market the process: Let buyers know that you care about their long term financial security and you have a process in place that will help them get the “right car at the right price”.

2. Make counseling a pre-requisite: Have clients complete a financial counseling session before they even enter the dealership.  They'll walk into the agency prepared with a budget that includes an affordable monthly loan payment amount.

3. Provide financial education materials: Most non-profits have plenty of educational pamphlets they can provide at little or no cost to your dealership. Making information available to your consumers on such topics as, budgeting, establishing credit, and saving for emergencies shows you care about their financial well-being.

Seeking partners for a pilot

Navicore Solutions is a non-profit financial counseling agency focused on improving the financial health of individuals and families in America.

We are looking to partner with subprime lenders, rating agencies and dealerships on a study to evaluate the impact that financial counseling would have on the repayment performance of subprime and non-prime borrowers. If counseling is shown to be effective in improving repayment rates, then borrowers who complete counseling could benefit from lower interest rates, lenders would have fewer repossessions and investment returns could be more predictable on auto loan asset backed securities.

Phil Getz headshot

Phil Getz is the Counseling Relationship Manager at Navicore Solutions, a nonprofit financial counseling organization focused on improving the financial well-being of individuals and families through education and personalized counseling.  Phil's experience working for both for-profit and nonprofit financial organizations over the last 25 years has provided him with a unique perspective on personal finance.  Contact Phil to discuss how Navicore's services can be used to benefit your business, your employees and the customers you serve.

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