Credit-repair services have been around for a while, but now they have begun to market their programs through car dealerships.
Consumers with credit scores below 550 have become increasingly difficult to get financed. Subprime lending market changes have made some customers, who were easily approved a few years ago, virtually un-approvable today.
A growing number of firms are helping dealers overcome this issue. These services can definitely help the dealer sell more cars, but they are not without some risk.
Credit-repair companies work with the consumer to theoretically dispute and correct erroneous credit bureau data.
In reality, by fully working the existing system, credit-repair companies can often get much negative credit removed from a credit report. Suddenly the customer has a substantially higher FICO score.
Certain items cannot be removed, but generally enough is scratched to make a customer, who was impossible to get approved, far easier to get financed.
Depending on your dealership's situation, these companies could help a dealer service a segment of customers that are currently a headache. Generally when a shopper with a low FICO score is in the dealership, one of the following usually occurs:
- The car is delivered, and the finance department spends hours trying to get the deal approved, even calling in favors with their lenders. If it gets approved, it is often cut back, and much profit is lost.
- The deal is a checked out, and the finance or special-finance department spends hours trying to get the deal approved, sometimes unsuccessfully and much time is wasted.
- The customer leaves and eventually buys a car somewhere else.
It might make more sense to offer such customers the option of using a credit-repair system.
These firms claim they can improve credit scores by over 100 points, with a 150-point boost not uncommon. The cost typically is about $500 per customer, with the customer contracting directly with the credit repair company and paying them the fee.
The fee is usually “refunded” in the form of a discount on their new vehicle, which can only be redeemed at the original dealership.
Signing up with a credit-repair firm could enable a dealer to deliver substantially more vehicles with a program that transforms difficult or impossible credit customers into average ones.
Credit repairs generally take 35-60 days to complete. It is a radical departure for most dealerships that want immediate delivery of a vehicle.
But, in their current situation, these are customers only in the broadest sense. By properly working the program and exercising patience, a dealership could quickly have a pipeline of deals that wouldn't otherwise exist.
Tips to consider:
- A credit-repair company cannot legally guarantee an improvement. Only do business with a firm that offers some sort of money-back guarantee for the consumer if they are unable to succeed.
- Banks dislike credit-repair services. The customers, who would have been an automatic turn down before, are now an automatic approval. While much of the removed derogatory credit could have been erroneous, there will likely be a portion that is exorcised simply because of how the current system works. So, from a lender's perspective, what is the real credit score and real risk?
- Ensure that the company is licensed and able to operate legally. Be certain to enter into an agreement that fully indemnifies the dealership.
- Make certain that responsible dealership employees have been fully trained so that they don't compromise the store nor make statements that are inaccurate.
Bryan Dorfler is a finance & insurance consultant. He's at [email protected]financeconsultants.com.