No Credit, No Problem, as the ads say. But No Credit Check = BIG Problem for you as a dealer.
I fully understand that the clientele coming into the Buy-Here-Pay-Here lot have a low credit score. That is actually a given. But a consumer credit report is more than just a numeric score. This report costs between three and five dollars, but information on it besides the score can save you thousands in the long run. If the deal is going to be in-house finance, wouldn’t you jump at an additional chance to make sure the buyer is going to pay you?
First, the Credit Report helps you satisfy the requirements of the FTC’s Red Flags Rule. The rule requires that you verify the identity of the individual applying for credit. The report can verify addresses, employment, and past credit history.
Second, there is information to be gleaned from amongst the delinquencies here. What you are looking for is *which* delinquencies he has. If the buyer has defaults or collections on “regular bills” such as house utilities, rent, and cell phone, then your regular car note bill will be a problem, also. Next, look for repossessions. One or two repossessions may be normal, but try to make some sense of why they had that default. When in doubt, ask. If the answer is a combative or argumentative one, then you should be cautious, because the next dealer he argues with over payments will be you. If the repo was over a dealer’s failure to fix a problem, then you may have a person who happily signs your “As-Is” statement today, but will hound you endlessly or refuse to pay over even minor issues (real or imagined) with the car. It could be that they were promised fixes that just didn’t happen. You won’t know until you ask. And if you do move forward with the deal, make sure that what you promise is in writing, and ask them twice if they understand your position.
Let’s agree to this one tenet: There are individuals in this world who simply cannot handle a payment agreement. Whether their bad credit is voluntary or due to their own incompetence, they do exist. There are people out there who, as they sit in your office, are already planning their trip to the bankruptcy attorney. There are some who sign whatever you ask, but have no intention of ever handing you another nickel. These are the people that you just have to learn to say “No” to.
Collections activity must be studied. Who or what is the deal, and was it paid in full or part, or is the consumer making payments on it? Was all of this bad activity before a certain time? Is it all happening right now? Remember, bad credit follows for seven years. A six year old late payment or default has almost as much effect on the credit score as one from last month.
Finally, the credit report can show employment consistency or residential history. If this buyer moves around a lot, and not just within the area, we are talking about city to city or state to state, he is a fairly large risk.
As for bankruptcy proceedings, look for active ones, or how long since last one, or any patterns that may lead to one very soon.
If you say No to this customer, then quite possibly, someone else will sell him a car. If it is a competition you are looking for, why make it the one who has the most repossessions or largest losses?
Remember that saying No doesn’t make you a bad person, it can make you a smarter business owner.