If you’re in the car business, you know that the number of people getting denied a car loan is on the rise. According to KBB.com, a new study from the Federal Reserve stated that more than 14% of car loan applicants were rejected over a 12-month period ending in June 2023. That is a significant rise from 9.1% in the last Fed study. And it may get worse. 39% of loan officers told the Federal Reserve that they expect to tighten their lending standards which will lead to even more denied car loans.
There is a convergence of issues leading to the record high rate of rejected auto loan applicants. Higher interest rates, higher auto prices due to inflation and supply chain issues, and the fact that auto loan delinquency rates and repossessions have skyrocketed, all contribute to tighter lending practices and therefore auto loan rejections.
Some car dealerships around the country are reporting that up to 30 to 40% of applicants are getting denied car loans. Because new and used car dealers spend so much in getting these people to their lot, the hard cost of lost marketing dollars is also on the rise and causing problems for car dealership owners.
What Can Car Dealers Do About Rising Turn Downs?
There may not be a lot that the F&I department can do to sell a car that day, but car dealerships can start taking a longer-term look at trying to bring that rejected car buyer back to their lot in the near future.
Higher down payments and longer loan term length can help get more prospective car buyers qualified. But as anyone in F&I knows, the #1 indicator of whether a prospective car buyer will get qualified is their credit score.
The good news is that increasing a consumer’s credit score can be a relatively simple and surprisingly quick process. Credit scores are calculated based on many factors. But the biggest of these factors is the number of negative items in relation to the number of positive items on a credit report. The concept then is to reduce the number of negative items and increase the number of positive items. In some cases, credit scores can increase by 50 points in as little as 45 days.
The FreedomPath Credit-Score Building Technology
We have teamed up with FreedomPath and now offer their AI technology platform to car dealers, real estate and mortgage offices, and solar companies to increase credit scores for those people who were turned down for a loan.
Negative Items on a Credit Report
This AI technology allows the consumer to see all 3 of their credit scores and credit reports immediately. It identifies derogatory items in the customer portal and allows them to click on those items that they want to dispute through any or all of the 3 credit bureaus. With the click of a button, dispute letters can be printed by the customer to send to the credit bureaus. Or they can have FreedomPath send the letters. The dispute process takes approximately 45 days, but items could be removed sooner.
Building Positive Credit
It might seem like building positive credit would take much longer. In most cases that’s true but what consumers don’t realize is that they are already making monthly payments of bills that are not being reported to the credit bureaus but easily and quickly could be.
Rent payments of up to 24 months and utility bills can be reported right away. This alone can increase a consumer’s credit score by up to 50 points within 30 days.
How Can Car Dealers Use
the FreedomPath Platform?
Typically, the salesperson has to share the bad news when a prospective buyer’s loan application is denied. Instead of just giving bad news, she or he can provide some hope and help. And they could start building loyalty so prospects could be back in that dealership relatively quickly with a qualifying credit score.
They can show the person who just denied a car loan a short 5-minute video and enroll them for the FreedomPath services. In fact, what some car dealers do is print out the dispute letters for them and get them in the mail that day.
The FreedomPath service costs $189 and $99 a month. The dealership gets $75 on every sale and $30 a month when the customer makes their payment. So, this is a revenue stream for the dealership to help offset lost marketing dollars and provide a way to spiff the salesperson.
Revenue Impact for Car Dealers
Calculate the Number for Your Dealership
Average Monthly Denied Car Loans - 100
Enrolled in Dealer Decline Program Monthly (30%) - 30 x $75 = $2,250
Annual Profit from Declined Customers $2,250 x 12 = $27,000
Monthly Captured Sales (50% of People Enrolled) 15 x Avg Gross Profit/Auto Sale $2,000 = $30,000
Annual Profit Gross Auto Sales $30,000 x 12 = $360,000
Total Incremental Profit = $387,000
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