Helping Sub-prime Buyers Out of the Credit Crevasse

In a society dependent on personal transportation, the buy-here, pay-here dealers and sub-prime finance sources provide essential services for a significant number of Americans. Unfortunately, these classes of car buyers rank among the lower quadrants on the consumer efficiency scale. The utility derived from each dollar of income earned is well below the national norm.

Are the personal straits of this segment of the population self-perpetuating? Are they escapable? In my view, it depends on whether their current state of affairs is due to circumstance or consequence.

Circumstance borrowers
The typical “circumstance car shopper” pulls into a buy-here, pay-here lot because a calamitous event dramatically altered his or her current personal or financial state of affairs. The loss of personal employment or a second breadwinner; a significant – often unexpected – medical expense, coupled with no or limited-pay medical insurance – often exacerbated by the inability to return to work; and divorce appear to be at the top of the list of the causal catastrophes.

In rare situations, the precipitating event is so apocalyptic that the impacted party never recovers. However, for the vast majority, their enculturation included both the rudiments and discipline of managing one’s money and paying one’s bills. Happily, they will find themselves at some point in the future shopping at the local Honda dealership.

A review of online customer comments gathered by non-prime finance sources reveals a few success stories posted by circumstance borrowers that stand out from the complaints about draconian dunning and repossession tactics. One such entry reads, “I got myself in money trouble and had to finance my car with XXX. I made my payments on time, improved my credit score and have moved on.”

Consequence borrowers
Buy-here, pay-here and sub-prime “consequence borrowers” account for the bulk of the clientele within these segments. Their fates are less certain. This group’s potential to move to a higher level of consumer efficiency depends less on their income – and more on their spending habits.

Deference must be paid to a segment of the population that simply fails to earn enough income to consistently pay their bills, regardless of how diligently they toil. A societal factor that is beyond the scope of this article.

Consequence buyers are made up of roughly two groups. The first has a level of income so marginal that they can only consistently meet their payment obligations through the most judicious money management practices.

The second group consists of individuals who, regardless of their income, habitually incur living expenses and debt beyond what they can afford. This group spans the economic strata. I asked the manager of a debt-repair service why his office was located in one of the most exclusive parts of town. His response? “That’s where most of my clients live.”
For a sizable segment of people living beyond their means, financial turmoil is generational. Many grew up in an environment with regular visits from bill collectors and frequent moves to another rental property. They’re simply perpetuating the status quo.

Stopping the self-perpetuating cycle
For those of us who make our living meeting the personal transportation needs of buy-here, pay-here buyers and the credit resource needs of non-prime borrowers, it might seem counterintuitive to alert them to other ways to shop for and finance a car. The rationale is both altruistic and cynical.

Simply providing money management guidance to consequence buyers who are ignorant of basic budgeting skills could help them build financial stability and climb out of the credit vortex. Dealers and non-prime finance sources could make plain language guides – deftly written so as not to offend the reader – available in print and online. Such an initiative would be favorably viewed by industry regulators and consumer advocacy groups.

Correcting the inevitable
As I learned with our regulatory compliance F&I program, changing behavior requires more than advice. To be truly effective, financial competence education must be provided within a live – person-to-person – interactive format. This training can be conducted at select locations or online with the traditional AV distance education setup. Such an initiative would likely be addressed at the industry level. It would also be favorably viewed by industry regulators and consumer advocacy groups – who might be enlisted as project partners.

My closing caveat pays homage to the realities of life. Buy-here, pay-here dealers will always have shoppers on the lot, and non-prime finance sources will have no shortage of credit apps to assess.

Dave Robertson
Dave Robertson, MBA, is a co-founder and the executive director of the Association of Finance & Insurance Professionals (AFIP), a nonprofit continuing education association. Dave’s 40-plus years in the automobile business include vehicle sales and F&I, followed by work as an account development manager and home office executive for a credit life company, industry consultant specializing in aftermarket products, and independent VSC administrator. Contact him at 817-428-2434 or [email protected]