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Problem Credit > Problem With Credit: Changing Faces Of Subprime Customers
Problem With Credit: Changing Faces Of Subprime Customers |
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The typical subprime customer may no longer be one with a history on non-payment of bills. Subprime is on the rise. Despite being a $228 billion market, only 30% of franchised dealers cover subprime areas. Dealers often prefer to avoid customers facing problem credit, considering them not worth the risk. This category still exists and is increasing in number. Financial and lending institutions have no desire to deal with them. Reversal of fortunes is common in many contemporary subprime cases.
The average customer profile for one of the biggest automotive subprime companies in the country is as follows: --Annual household income of $48,000 (national median being $42,000) --Six years at current job (national average being four years) --40% own homes --Six years at current residence Hardly the typical subprime customer, an increasing number of people are falling under the subprime category. Among Americans today, over 40% have some type of credit problem. The special finance managers at dealerships attribute the driving force behind these dynamics to divorce. Divorce is among the most damaging factors in credit ratings. Then there are those who have failed in starting their own business and those with huge credit card debt. Even with well paying jobs, credit is poor. In the past year there's been a sharp increase in the number of unbankable customers in the market. Because more people have credit problems, banks and lending institutions are more careful in choosing customers. This creates difficulty for special finance managers. In the past, the sale was the main goal,but now it is customer financing. Several banks and financial institutions use the Beacon scoring system to select customers. This helps them predict which customers can turn into a serious credit risk. The score is determined from the customer's credit report based on details like payment history, outstanding debt and type of credit. With low scores or credit problems, customers are seen as high risk and come under the category of subprime or special finance. Barely a few years back, lending companies raced one another to offer financing to these customers. Customers with Beacon scores of 470 got approval without any hassle for the dealer. A score of 600 meant prime category. Lured by promises of huge profits, finance companies and banks jumped into the subprime market in large numbers. Wall Street was no exception: from 1992 to 1997, 35 subprime companies went public. From the mid to late 1990s, the industry was on a roll. However companies grew too fast and too soon, with poor management and hastily buying paper from dealers to fuel growth. The typical special finance Beacon range of 480 to 525 is no longer desirable for lenders. According to experts a few years back rehabilitation of those customers was still possible. The lesson was that customers didn't pay and still don't. Huge losses resulted from customers defaulting on loans prompting tightening of credit standards for those facing problems with credit and raised the Beacon score level for funding. The rising trend still continues. Lending companies notify dealers that customers with Beacon scores below 540 are not wanted. It is more likely that these people will succeed in repairing their credit compared to those with much lower Beacon scores. Customers falling below the 540 level are being pushed down to the buy-here-pay-here independent dealers. Certain banks, mostly local, occasionally fund people with a problem with credit. Much higher rates are typically charged than buy-here-pay-here operations. |
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