Non-prime might just be the fastest growing segment in automotive retail. Moving from a seedy gas station lot on the corner to billion-dollar finance institutions. Car dealers and finance institutions alike are recognizing non-prime finance as a fast growing and very lucrative market. But what are they missing?
It seems as though we have decided that automotive finance breaks down into two categories. Prime and non-prime. In other words, those clients that qualify for the lowest rates offered by finance institutions, and those that don't. Black and white. Simple. Even most banks have departments that operate separately. One division does prime. The other, non-prime. Even dealers, mostly used car dealers and departments, seem to define themselves in the same way, one focuses on price and is competitive, the other on non-prime and converting third party leads or internet credit applications into deals. The used car industry in particular seems to have separated into two camps. Prime and non-prime. That's the new reality.
Thirty years ago while I sat behind the desk at a Chrysler store as the GSM, we had a guy named Mr. Green who sat in a corner office. His name wasn't really Mr. Green, he just called himself that in the ads we would run in the local paper. You can imagine why he chose that name. His gig was advertising to people who had credit challenges and needed a car. The staff thought he was some kind of genius, or magician. Customers would go into his office, get the crap grossed out of them and drive away. He worked 9-5 Monday to Friday. Normal hours! Customers would call him and ask for appointments in the evening or on Saturday and he would say no. He would say, "Listen, who do you see when you have a toothache?" and the customer would respond "The dentist," and then he would say "Dentists are only open during the day, how do you see them if you're working?" and they would respond something like, "I take the time off," and then very confidently he would simply respond, "Ok, then I ask, do you need a car or don't you?" and they would come. Seeing him was literally like going to the dentist! You needed to go during the day, and it was definitely going to hurt.
Non-prime has suddenly become this massive emerging market.
Times have really changed! You can go see the non-prime guy seven days a week now, but it's still going to hurt. Back then, there may have been only a few banks or finance companies working in non-prime. And literally it was like pulling teeth dealing with them. Non-prime was the great mystery. Not so much anymore. Banks have figured out how profitable it is and have begun lining up at the well. More and more dealers are discovering non-prime and have forgotten how to sell any other way. What began as a very small niche piece of the car business has suddenly become this massive emerging market of non-prime with seemingly no limit to its size. Even some manufacturers now have non-prime as part of their enhanced rate financing. 0% for 72 months, unless you have bad credit that is, now it's 8.9.
It seems as though everyone is trying to get into the game. Why? Money of course. It's profitable. The banks make more money with higher interest rates. The manufacturers sell more cars. The dealers not only sell more cars but retain higher average grosses. And there it is. The dirty little secret of non-prime. The customers are more focused on just getting approved, or on the monthly payment, and that lets the dealer better control the gross. Profit is not a dirty word. That is the way capitalism works.
The customers are more focused on getting approved.
Dealers can profit as much as they are able on every client. But here is where it becomes a problem. When you forget that the customer is the most important part of the equation. That customer satisfaction matters. That business ethics matter. You miss the whole point of the goal of the business. To create satisfied customers, and keep them, while making a profit. Many in non-prime have created this giant game of smash and grab, and the carnage is significant. And really the only thing that will change that is the customer, and it will change. Because the market is growing. It's becoming competitive, and the more competitive it becomes, the more control the customer has, and that is the beginning of the end for those dealers in the smash-and-grab business. As more and more dealers, traditional dealers, new car dealers, quite frankly all dealers and all banks figure out non-prime, the jig will be up. The customer will have control, and the ethical dealers will take over.
So as you look at non-prime and think, "This is an area where I can make some money," first, you're right, it is. You have to be there, because everybody has to be there or you will miss out on the fastest-growing segment in automotive retail. But I would avoid at all costs making the experience feel like the customer is going to the dentist and start realizing they are your customers, and making sure they are satisfied is the only way you're going to keep them when the rest of the market figures out non-prime. Good luck and good selling.