Although the average credit score in the US is 711, in 2020 almost 30% of car loans went to subprime borrowers with scores below 600. Deep subprime loans, with scores below 500, made up 4.5% of that statistic. And with credit requirements for used car financing offering more flexibility for buyers with lower scores, subprime options are a must-have for dealers. But understanding more about these buyers and their credit score can help you provide the best customer experience for this large demographic.

1) The Generation Gap

As they begin to make important life decisions, millennials fall disproportionately in the subprime category, making up close to 40% of subprime consumers. Closing that gap is Generation X, at just over 30%. Coming of age in a volatile economy, housing bust, and the Great Recession, growing personal wealth and credit has been an uphill battle. And, of course, the pandemic only set things back even more.

The CARD Act, a federal statute that took effect in 2010, included a provision that made it more difficult to get a credit card before age 21. While the intent was to protect young borrowers from falling into debt, the truth is that credit history is needed to have good credit. Younger buyers may not have lower scores from missed payments or high balances–they may just be getting started.

Why this matters: These generations will make up 75% of all buyers by 2025. Finding lender partners who offer both the subprime options younger buyers may need and the simple, transparent process that this age group expects can give your dealership the advantage with this demographic.

2) Location is Everything

In 11 states, over 40% of consumers are considered subprime. The lowest credit scores in America can be found in the South: Mississippi (675), Louisiana (684), and Alabama (686). If your dealership does business in these states, there’s a good chance your buyers will need subprime lending options:

• Alabama
• Arkansas
• Georgia
• Kentucky
• Louisiana
• Mississippi
• Nevada
• New Mexico
• Oklahoma
• South Carolina
• Tennessee
• Texas
• West Virginia

Why it matters: There are many reasons geography can impact economic status and consumers’ ability to repair credit. The high numbers of subprime borrowers in these locations may mean that dealerships working with multiple lenders with flexible financing options can help you serve a greater percentage of the customers who walk through your door. Make sure potential buyers know that you have alternatives that could work for them, even if they have a lower score, to stand out from the competition.

3) Understand The Nuts and Bolts of FICO®

FICO® uses percentages to determine a consumer’s final score:

• Payment history: 35%
• Amounts owed: 30%
• Length of credit history: 15%
• Credit mix: 10%
• New credit: 10%

Credit scores can be confusing, but when they can mean the difference of $100 or more in a monthly payment, borrowers need to understand the calculations behind them and what they can do to improve.

Why it matters: Chances are, no one has walked through a credit report with your buyers in a way that explains why they may find themselves in a subprime category. Your F&I managers can do more than find the right financing for buyers–they can help them understand the steps necessary to raise their score by breaking down where those scores come from in the first place. This consultative approach can help build relationships that lead to loyal customers.

4) Interest Rates, by the Numbers

It’s not often that dealers have the opportunity to see just how far rates can swing for “super prime” and deep subprime buyers, especially if your average customer has a lower than average score. But the differences in rates can be surprising:

Deep subprime (300–500): 20.45%

Subprime (501–600): 17.74%

Non-prime (601–660): 11.26%

Prime (661–780): 6.04%

Super Prime (781–850): 4.29%

Why it matters: At face value, buyers may not understand what a higher rate means over the life of a loan. The Truth In Lending Act requires that all lenders explain the full terms of loans in a format that consumers can easily understand, including the APR and the total amount to be paid through the loan’s lifetime. Make sure your dealership is compliant with the TILA and other regulations that the industry faces.

5) Budgets are Tight

While many factors can drive a lower credit score, the top five reasons someone may have nonprime credit include:

• Missed or late payments
• High balances
• Overdue accounts
• Frequent inquiries
• Short history

Why it matters: Borrowers facing these challenges most likely have a limited budget that could quickly become overwhelmed by an unexpected car repair bill. But when every dollar counts, they may balk at the idea of adding to their monthly car payment to cover potential problems. Ensure your buyers understand the costs they could face down the road for everything from a flat tire to major engine repair. If there’s no room in the budget to cover these expenses should they come up, the value of the protection products your dealership offers can become more apparent.

Understanding subprime customers and their specific needs can help your dealership work with this growing demographic. As a leading provider in the subprime space, GWC can work with your dealership to expand your lender base and provide your buyers with the confidence that comes in making an investment they know is well-protected.