Educational Selling with Credit-Challenged Buyers

“Anything more than 3% and I’m being taken advantage of!”

This is what a recent customer (I’ll call him Tony) said to me while I was working on the show floor with a dealer client of mine. Tony wanted to know if we can get him approved on the car he wants and with a 3% interest rate or less.

The problem: Tony is a 1099 worker with little to no POI (proof of income), hasn’t filed tax returns in 3 years, is a recently released convict, has a credit score in the low 500 with a shallow file, and doesn’t have a lot of positive things showing on his bureau.

There are several obstacles to selling credit-challenged buyers like Tony. To overcome them, I want to share with you the following 3 things in this article:

• What educational selling is
• How educational selling can help separate you from the competition
• How educational selling will help you sell more with less resistance

We will get back to Tony in a minute but first, let’s define the terms a little.

Educational selling is different than informational selling.

Informational selling is stating what you can or will do for the customer. When salespeople or finance managers say things like “we work with lots of banks to get you approved” or “we’ll get you the lowest rate you’d qualify for,” they’re engaged in informational selling.

Educational selling is different because you tell customers how it works, pull back the curtain, share, teach, and explain. You educate them. I’ll show you the S.W.A.T. technique later in this article that you can apply with a credit-challenged buyer and you’ll love it!

So let’s consider a typical buyer with financial struggles who comes to your dealership wanting to finance a car loan. Here are the 3 biggest challenges a salesperson needs to be aware of:

1. They do not understand how money or even basic math works – this is the reason why some of these customers are in the situation they are in.
2. They do not understand how financing works. They don’t understand carry, rate, risk, DTI (debt to income ratio), and how other financing variables affect getting a loan approved.
3. They do not understand why they can’t have what they want. And if they are approved by one dealership, they think they can get any car and shop around again and again.

This is where educational selling will help you!

Let’s get back to Tony who said to me, “My friend told me that anything over 3% is me getting screwed so I need to know what you guys can do, because I’m not paying a high rate and getting screwed!”

   Me: “It makes sense what your friend is saying. He’s saying that you should try to get as low a rate as possible so that you are paying more for the car than for the loan. Your friend is right! The lower the rate, the better. I’m happy to help you get a nicer newer car and also share with you exactly how we can help you get the best program you qualify for.

That brings me to my first question. Do you know exactly how a bank assesses risk and determines the rate that anyone qualifies for? Has anyone ever shared with you that the rate of a loan is always a reflection of the loan’s risk?”

   Tony: “Uhm, no. I kinda know how it works but not really. I just want to know what you guys can do for me.”

   Me: “Part of what we can do for you is to not only show you what programs we can offer, but also help you get in a position to get a better program next time as well, so that you improve your financial position each time you buy a car.

The first thing to know is that the rate a bank issues on a loan is ALWAYS a reflection of the risk of loaning that money. Someone with ZERO risk to the bank could qualify for 0%. The higher the risk, the higher the rate.

Let’s look at the 4 variables a bank will consider to establish risk and to see how the bank will determine a rate for you:

• Stability
• Willingness
• Ability
• Track record

Each of these variables will help a bank assess your risk and therefore determine your rate. I’d like to go over them with you, so let me write them here on this piece of paper, is that okay?”

   Tony: “Sure, okay.”

   Me: “Let’s take a look at each factor individually so you can get a better idea of what rate the bank may offer for your current situation.

The 1st factor, stability, has 2 parts: 1) Your stability of job time – how long you’ve worked at the same job. The banks typically look for at least 3 years to show job stability. And 2) Residence time – how long you’ve had the same address; and again, banks typically consider 3 years as stable residence. Keep in mind that the more stable you are at your job and home, the less risky the bank considers you. Lower risk equals lower rate. So, how long have you had your job and your latest residence?”

   Tony: “Well, I’ve been at the same job for 3 months, and before that I had one for 9 months and a couple part-time jobs here and there for the last couple of years. And I just moved 2 months ago to a new apartment. But before that I was at the same address for 1.5 years. So I guess I don’t pass the 3 years requirement?”

    Me: “We have programs to help people who don’t meet the desired stability, but keep in mind that not meeting requirements in each area increases the overall risk and therefore affects the rate.

The second factor banks consider is willingness. Willingness also has 2 parts: 1) Your willingness to contribute to the process financially, which means contributing cash down. Banks typically offer preferred programs with 30% participation. For example, on a $20,000 car you’d participate by putting about $6,000 down. Keep in mind it’s all about lowering the bank’s risk since anyone who puts 30% down is not going to miss payments and let the vehicle go back to the bank because they have so much ‘skin’ in the game.

The 2nd part of the willingness factor is your willingness to be flexible, meaning that the bank may have limitations on the vehicles it is willing to give you a loan on. Some people say, “I only want THIS car,” to which the bank might say, “Well, we will only loan you money on THAT car.” And so flexibility is important when it comes to getting someone else to loan you thousands of dollars.

With that in mind, would you have 30% down or would you need to look at programs with less than that? Also, are you willing to be flexible on the car in order to get a loan?”

   Tony: “Wow, I don’t have anything like $6,000 right now! I barely have $500. But as long as the car is reliable and nice, I am open to options.”

   Me: “Great! Keep in mind that the less cash down you provide, the higher the risk for the bank. But I’m happy to show you what we can do based on $500 to $1,000 down.

Let’s look at the third factor, which  is ability. Just like the others, it also has 2 parts: 1) Your ability to pay based on income, such as how much you make compared to your bills. And 2) Your ability to pay based on how you earn your income – if it’s salary, hourly or 1099.

The banks we work with have different programs, but as a general baseline, a provable income of $3,500 per month is where the better programs start. Also, how you earn income affects the risk and the rate: salary is the least risky, then hourly, and 1099 has the highest risk. So how much do you make that’s provable and how do you earn it?”

   Tony: “Well, for one of my jobs I get paid a lot in cash. And for my other sales job I’m entirely 1099 right now. I used to be hourly at a restaurant. But now it’s all 1099 and I can only prove about $2,000 to maybe $2,500.”

   Me: “As I mentioned, you are not the first client we have helped in a similar situation… But as you can see, your situation so far is a VERY HIGH RISK. Keep in mind that you are asking someone that doesn’t know you to give you tens of thousands of dollars!

Let’s look at the last factor, which is track record. Again, it has 2 parts: 1) The types of loans you’ve had in the past (auto, home, credit cards, medical bills, etc), and 2) How you’ve paid those loans in the past – never missed a payment, been late, or have had some closed for non-payment.

The larger the loans and the better you’ve paid them, the less risk you have. If you’ve never had a $20,000 loan before, the bank has no track record that you will pay it. Or if you’ve been late on payments with smaller loans, they assume you’ll miss on bigger ones as well. It’s all about risk! What types of loans have you had and what is your payment history?”

    Tony: “I haven’t had many loans because I went to prison when I was 21 and got out at 32. And what I’ve gotten since, I’ve paid as best as I could. But it hasn’t been perfect … So based on all of this, I’m not going to get 3%, am I? I can already tell. So how high is it going to be? Like 20%?”

Let’s pause for a moment as I want you to understand what just happened. I haven’t told Tony there is no way he’s getting 3% or that it will be hard for him to get a loan. Based on my educational selling, he came to this conclusion by himself! A typical salesperson might try to tell this type of customer, “We can’t get you what you want,” only for the customer to get defensive and feel like he or she is not being valued. But if you engage in educational selling, there will be less resistance and confrontation in your process.

   Me: “Honestly, 20% wouldn’t surprise me assuming we can get a bank to do a loan at all. I’m confident we are the best dealership to help you. I just wanted you to understand how a bank will look at your situation and what it will take on our end to position you for the best chances.

As you now realize, in your current season of life you are VERY HIGH RISK for a bank. Since rate is a reflection of risk, your rate will most definitely reflect your risk.

Your friend who told you that getting anything higher than 3% means you’re being taken advantage of either doesn’t know your entire situation or is willing to loan you the money himself at 3% if he is so confident. Does he have the money and will he loan it to you?”

   Tony: “No way! He doesn’t have it. And he doesn’t know everything either …”

   Me: “I understand. Let’s see how we can help and if we can, what we can do for you.”

Two days later Tony was approved for a new car. He signed out at 23.9% and a payment of over $600 per month.

Even though that car payment would typically be around $350 per month for a low risk customer, Tony willingly chose to pay a significantly higher rate. He understood that the added amount was him paying for the opportunity to prove to the banks that he could be trusted. He also accepted that the higher rate was a reflection of his higher risk and that if he made payments on time, it will qualify him for much better programs for his next big purchase.

This is the goal of educational selling – to provide information in such a way as to empower the customer to make a more informed decision and to strengthen the rapport with the salesperson who educated them. Educational selling can be applied in many situations.

In this example of using educational selling to help a credit-challenged buyer, I used the SWAT technique to explain that when banks determine someone’s risk, they look at these 4 variables:

1. Stability (in job and residence)
2. Willingness (to contribute to the loan and to be flexible on the product)
3. Ability (to pay and to earn income)
4. Track record (types of past loans and payment history)

I hope this will help you engage in educational selling with your next customer! If you liked this article, connect with me to get future sales tips:

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