One of the most important roles a special finance manager can have is that of “Credit Counselor.” More often than not, we talk about advising their “no sales” or declines, in an effort to hold on to them and possibly sell them a vehicle later, after they have “updated” their credit. A proactive approach to this concept is to assume the role of credit counselor to sell these customers a vehicle now, during the sales presentation. Doing so will help you control the process, keeping the customer focused on the “credit decision” and away from the “product decision” until you are ready to do so.
While bad credit may be obvious to someone looking at credit reports all day, many times a customer may not realize what their credit problems may be. Credit counseling is an effective way to maintain control of the specialty finance sales process. If the process is done correctly, the applicant’s expectations will be kept at a reasonable level.
So first of all, what exactly is bad credit? Many types of credit report problems are considered a sign of bad credit and could cause a lender to reject a loan application. Such problems include: missing a credit card payment, defaulting on a previous loan, filing for bankruptcy in the last seven years, or not paying taxes. Other black marks on a credit report include a judgment filed (perhaps for non-payment of spousal or child support) or any collection activity. For many special finance clients, these can be regular occurrences that they don’t consider bad credit.
The credit counseling process begins with the client interview. The credit application must be reviewed during the interview with the client. Take the time to find out if there are any potential hazards. Look for gaps in residence or employment. Find out details about the client’s living arrangements. Do you rent or own? Is the monthly expense divided with someone else? Is the income correctly declared and is it verifiable? This process starts the conversation in a non-adversarial way. Not only do you get to know your customer better, but this process gets customers to talk freely about themselves.
Once the application has been fully reviewed, it’s time to move on to the credit report. Remember that the goal here is to keep the customer focused on the “credit decision” and away from a “product decision.” Take the time to explore your credit file to see if there is an explanation for any problems that may arise.
Too often, reviewing a credit report with a customer was simply marking all the derogatory information with a big red magic marker. Raise as many red flags as possible and beat the client into submission. Public humiliation was supposed to make customers acknowledge their bad credit and accept that fact. This is all in the name of big wins!
Effective credit counseling involves getting a client to acknowledge their credit problems without humiliation. Review the entire credit report, listing not only the derogatory information but also the positive accounts. Look for a positive credit reference that can be used to build a case to present to a lender. A previous car loan that paid off reasonably well, or even a car loan that paid off well over a long period of time before it was repossessed can be used as a positive benchmark. Look for patterns of good credit that may have preceded your current credit problems.
Ask your customer if anything happened to them that led to their credit problems. A catastrophic event, such as a serious illness, the closing or bankruptcy of an employer, a military call-up, or any number of personal tragedies can lead to credit problems. Now is the time for your customers to tell you their story, so you can pass it on to your lenders. Review each line on the credit report with the customer. Ask for explanations and make notes where appropriate.
This may take a little longer than you’re used to, but it helps set the stage for reasonable expectations from your customer. It also shows them how much work you have to do to get approved for a loan.
Take your time to explain the process. After the credit review, explain how a lender determines whether to approve an application. Review the SAW principle that most lenders use to consider an applicant. – Stability, Ability and Willingness to Pay. Remember that many “D” tier lenders look at more than just an applicant’s credit score, and in many cases, these lenders do not consider an applicant’s FICO score in their approval process. Marginal lenders look at the total picture of the applicant to determine if they will approve a deal. An applicant with a stable employment and residency history and a decent income has a better chance of being approved for a loan, even with a spotty credit bureau, because the lender knows that they will be able to collect the payments, even if they are a little late every day. months!
Explain “debt to income” and “payment to income” ratios to your customers and how lenders use them to determine which vehicles they will qualify for. Many customers want a lot more vehicle than they can qualify for, their rationale is “I can afford that amount.” Explain how lenders, using all available data from the large number of loans they make, have determined which loans are most likely to be repaid and base their decisions on this date. They know that any payment that is more than 20% of an applicant’s income is much more likely to lead to default and recovery. Lenders want to collect payments and structure their approvals based on the data they have. This is especially true if a customer has had a history of slow or late payments on their previous auto loan. The lender figures that “if they couldn’t make that payment without some problems, I want my payment to be lower than that!” Explain that excessive monthly obligations eat up a substantial portion of your income, and most lenders will only consider applicants with less than 50% of income used to pay their monthly bills, including rent. This is especially true with a customer who already has an open car loan and was not planning to change it. In either case, explain that the lender will usually request a co-signer, but you will submit the application and see what it says. Leave the decision up to your lender, and let your client take the burden of meeting the lender’s approval requirement.
Please take a few minutes to explain how fairness can help in an approval. Lenders like to lend less than the book or wholesale value of a vehicle to marginal customers. Sometimes a large down payment can convince a lender that an applicant will make the payments, since they have a stake in the loan. Remind your customers that while many lenders may consider a loan with no down payment, they generally like to see taxes, tags, and fees paid upfront by the customer. Many customers, who say they don’t have money available for a down payment, will set aside cash to pay these fees. They don’t see them as a down payment, so be sure to ask how they plan to pay the taxes, license plates, and fees on the vehicle they’re trying to buy.
Many customers will go from dealer to dealer trying to get a loan. They often apply to multiple websites promoting easy credit approvals for bad credit customers in the hope that someone will approve them for a loan or give them a better approval than they may have already gotten elsewhere. As a credit counselor, explain that for the most part, dealerships work with the same lenders. While there may be a new lender or two on the market, you know and work with virtually every lender available. Explain that the callback from these lenders is based on the information provided and as such will not vary from dealer to dealer. In fact, explain to them that multiple applications can cause a lender to reject an application due to “excessive inquiries,” which can lead the lender to think the customer is trying to purchase multiple vehicles at different dealerships.
Matching customer expectations to reality is sometimes the hardest part of the advisory role. Explain to a customer that lenders aren’t there just to help a dealer sell a car, but to make sure they can collect on the loan. Giving a customer a loan that a lender believes the customer can’t repay is in nobody’s interest. Lenders don’t want to make a loan today just to repossess the vehicle tomorrow; they earn their money only if they can collect payments. Explain that, to help rebuild your credit; customers with credit problems should “crawl before they walk.” This is all part of the process of rebuilding your credit. There has to be a solid foundation to build on; Nobody builds a house from the top down!
Lenders realize that credit challenges often result in setbacks for these customers. Your job is to help them overcome these setbacks. This is usually the beginning of the process to rebuild your credit. They need to start with a vehicle that not only fits their budget, but provides reliable transportation while they rebuild their payment history. Once the favorable payment history is in their credit bureau, they can move to a better vehicle with more favorable terms.
Let your customers know that your dealership will be there in the future to let them know when the time is right to make that move. As their auto credit counselor, you’re in touch to help them get on the road to better credit! Not only will they get a car loan with your help, but by paying off this loan on time, they’ll be on their way to getting a credit card and maybe even a mortgage. You can even provide them with a list of banks that provide Visa or MasterCard accounts to people with credit problems, or information that can help them improve their credit reports for free, instead of throwing money at a fraudulent “credit repair” company. .
To review the credit counseling process:
o Review the credit application
o Check the credit bureau
o Look for both positive and negative references
o Explain the process
o Explain SAW and how a lender views the application
o Review debt-income and payment-income ratios
o Determine available down payment
o Adjust customer expectations to reality
o Review qualifying vehicles
o Review how to improve the loan
o Explain the credit rebuilding process
o Explain “credit purchases”
o The effect of excessive inquiries
Being a pre-sale credit counselor will help you close many more special financial sales. Take the time to talk to your customers about their credit situation and show them that you can provide some answers to their problem. By doing this up front, you’ll build a relationship with these customers that will allow you to maintain control over the sales process, which is essential for specialty finance. Not only that, but it prevents you from educating a customer you thought wasn’t a sale, only to send them elsewhere to purchase a vehicle.