The Credit Criminal’s Guide To Buying Cars, Part 1: You Can’t Have That

Notorious drug-dealer-turned-car-dealer Ethan Gaines has returned to our pages with one mission in mind: to share forbidden knowledge with auto enthusiasts whose lives haven’t exactly followed a straight and narrow path. In Part One, he dispenses a few hard-to-swallow pills about what you can expect, and not expect, as a credit-challenged buyer.

As American consumers, most of us feel confident that we can buy pretty much whatever we want, as long as we have some kind of income. Even if we have limited liquid cash, we know there is someone out there willing to extend us some level of credit to buy things. According to Experian, 85 percent of the new cars sold in America last year were either financed or leased. Keep in mind that many people use other, hidden sources of credit to buy cars, like home equity loans or even unsecured personal loans. So what this means is that loans have been made available to a large group of Americans, not all of whom are necessarily solid candidates for said loans. On the bottom end of this group is the sub-550 FICO score, or what banks call the “deep subprime” customer.

I dealt with a lot of these customers on the used and new car side of the business under a different nickname: credit criminal. In most cases these customers had very long lists of derogatory credit items, plus what you might call “limited” income. This obviously led to a lot of challenges and woes, for me and the customer alike.

One of the biggest challenges I had to overcome was the expectations these customers had as they came onto the dealership floor. One of my favorite sales managers selling Nissans was an old-school, New York wise guy named Mike. He coined “put them in a Versa” as a catchphrase. Customer has 5 kids and needs an SUV? Alright, get them an SUV—but if their score was under 550? Put them in a Versa. Customer has limited income? Versa. Customer has no money down? Versa.

Now, Mike had been in the industry over 20 years and knew the path of least resistance, a lesson that took time for me to learn. Most people, some salespeople among them, don’t realize that the modern car dealership’s job isn’t to sell you a car, but to sell you financing and additional products. So if someone comes in who can’t qualify for a loan on their desired car, there’s still money to be made getting them a loan on something for which they can qualify. These people are still potentially profitable customers—but unlike that 800-FICO fellow who has five different dealerships e-mailing him low-profit deals on popular SUVs, the credit criminals are going to be folded, spindled, and mutilated by the dealership financing process until someone makes money.

I’ll give you an example that happened almost too often to believe. A customer comes on the lot wanting to purchase a new Altima. They notify me that they have no money down. Plus they have a trade they still owe money on. Their budget? $400 a month for a tax-included payment. We go to the lot and pick out the Altima they love, take it for a drive, then come back to arrange financing. Then the bottom falls out of everything when their 480 credit score comes up on Dealertrack. Now the sales manager is giving me the stock number to a similar colored, base trim Sentra to pull up and show the customer instead.

Now this is usually where a sales professional shows their true abilities. We gather the customer and immediately take them to the downgraded car and show it to them as if it already belongs to them. While the salesperson is doing this, the sales manager is already begging a bank to do this deal. If it goes to plan, the customer buys the new Sentra for $1500 down and $500 a month. Less car than they wanted, more money—but they’re sold and rolled.

When it doesn’t go right it starts with: “Uh-uh I ain’t driving no damn Sentra!” In this situation I usually hit the customer with something along the lines of “This is what the bank approved you for,” to derail their thought process and get them to understand that we are “doing them a favor” getting them an approval of any kind. But then customers begin to ask why they can’t get approved for the bigger car.

There are many individual factors that can contribute to this situation. Number one is income: for those deep subprime customers the banks typically won’t give them a payment for more than 20 percent of their income. Almost every bank requires a customer to earn at least $1800 a month, so for a customer that barely meets the income requirement this equates to a $360 payment. At the lower end of the interest rates I’ve seen these customers pay, that equates to financing somewhere around $15,000 for 72 months. The math-savvy individuals reading this are probably asking how a human being pays 19 percent interest for six years, but I’ll go over that later.

Even if these customers have a higher income, some lenders will introduce a maximum cap on loan size due to either previous payment history or previous high auto loan balance. To explain, some lenders base the amount they’ll lend a customer based on just purely how messed up your credit is with no regard to income. The customer earns $70K a year, but previously defaulted on a $20,000 auto loan? The bank might lend them $12,000 in a high interest loan with multiple extra conditions regarding anything from where the vehicle is garaged to a mandatory direct bank-account withdrawal for payments.

What’s this mean? Well, if you just logged out of Credit Karma and your score starts with a four, please lower your expectations when walking into a dealership. Your best bet of leaving with an automobile doesn’t involve how much you believe you can afford, but rather what the bank believes you can afford. I’ll explain more about what (and how) the bank believes in the next installment of this series.