Working with Subprime Shoppers Part of the New Normal?


The US economy will rebound, as it always does. Between today and an eventual stabilization, there are bound to be significant challenges for business and consumers alike. Retailers like JC Penney, J Crew, and Neiman Marcus have filled for bankruptcy among the disruption, and Fitch Ratings forecasts that institutional loan default rates will climb from 3% to 8 to 9% by the end of 2021 due to “drastically lower revenue”. That’s surely going to carry over into consumer loans as well.

Just before the COVID-19 pandemic, the 2020 Financial Literacy Survey was performed by Harris Poll. 27% of survey respondents admitted to not paying their credit card bills on time, and almost 7 out of 10 said they found it difficult to minimize their debt due to unexpected financial emergencies or reduction in income. That’s before the pandemic.

Experian data from 2019 shows that 34.8% of consumers had subprime data, and both of the factors that survey respondents identified as factors making it tough to reduce debt have been exacerbated. Millions have sought unemployment insurance in the past few weeks, and many will be waiting weeks or months longer before going back to work. Subprime ratings are bound to skyrocket.

When their credit has eventually been maxed out with no way to repay, customers once rated as prime will be challenged to buy cars at a competitive rate. Salespeople will likely need to learn techniques to get customers into the driver’s seat in a way they haven’t had to before. 

Seeking Pre-Approvals

It’s difficult to predict how many customers will have subprime credit in the coming 3 to 18 months, and beyond. With last year’s rates around 1 in 3, it could easily be 1 in 2 car buyers who have subprime credit in the future. That changes how dealerships will be able to effectively engage customers and bring them from shoppers to buyers.

Credit pre-approval is perhaps one of the most effective ways to do so. Salespeople could lose the deal late in the process if payments have been erroneously based on prime interest rates that give a false sense of hope to credit-strapped shoppers. A pre-approval keeps figures realistic and ensures the right vehicle is being sought for the budget.

Some shoppers who have credit that has downgraded might find it offensive, and salespeople will need to find methods that turn pre-approval processes into a normal, everyday event regardless of the client. 

Converting Low Interest Shoppers to Cash Rebate Buyers

In today’s market, new cars have incredibly low interest rates that attract potential buyers. If they don’t qualify for the 0% over 84 months, though, it doesn’t always mean they can’t afford the car. Salespeople can keep their customers interested by working two ways: an assumption of prime credit and related terms, and a back-pocket subprime approval with cash rebates as a backup.

Rather than having to switch last-minute, present the comparable information to the customer during the soft close so they aren’t caught by surprise in the F&I office. 

Credit Counselling

Unfortunately, car shoppers with high DSCR may simply not be able to buy their desired vehicle at their current point. While it’s not a salesperson’s chosen career, offering advice to receptive customers could help bring them back when their credit has recovered.

A salesperson should equip their toolbag with a few solid strategies to offer including: 

  • Pay down existing debt with highest interest rate first
  • Ensure all obligations are current
  • Consider a low-cost car at a high interest rate for the short term to restore credit, then switch in a year for the car they want

A thorough wants and needs assessment should help a salesperson mine data to steer the discussion. And no matter what financial situation the customer is in, it’s imperative to maintain a high level of discretion and empathy to make the customer feel comfortable.