Automobile Dealer Magazine

Special Finance: Building Trust

by Paul Snider

The clear message being sounded throughout the financial world is that the sub-prime industry is rapidly growing. Consequently, lenders and Automobile Dealers are being forced to improve the way they do business and the way they communicate with each other and are also building relationships that will be lasting.

Early on, many dealers would gross an average $3,000 - $4,000 on a sub-prime deal. What we're seeing today is that dealers who want long-term success in the special finance niche are taking a different look at sub-prime. Even in a non-recourse situation, a dealership can still be negatively impacted in the event of a default or repossession, be it caused by overcharging, by payments which are too high or by a "mechanically challenged" vehicle. In any case, the customer will never blame the lender for their circumstances. They will always blame the dealer. "I told the salesperson I couldn't afford the payment," "The price was too high" and "I didn't want that piece of junk to begin with" are typical customer responses. Often, a significant, steady decline in sub-prime business is a dealer's first indication that he has gotten a bad reputation with special finance customers, and obviously that's too late. It's also plausible that the other areas of a dealer's business could be adversely affected by this reputation.

Successful dealers that we're working with now and the dealers that will continue to succeed in the sub-prime market are shooting for average profits between $1,500 - $2,100 and are selling mechanically sound vehicles that the customer can actually afford.

Wall Street has been quoted as saying that the sub-prime finance industry is growing at an annual rate of 15%. Credit card debt is continually rising, bankruptcies are rising, unemployment is rising---we're not going to run out of customers for sub-prime financing any time soon. Successful dealers recognize this and they have put into place stopgap controls to not only manage the inventory, but also to ensure that the vehicles will make it to the end of the term. These dealers build strong relationships with their lenders, requesting reports on their loan portfolios on a regular basis in order to be aware of the performance of loans which the dealership has generated. These dealers are looking at their profit potential and have determined that this is a long-term venture.

You can look at special finance only in the short term, make a lot of money, "strip mine" the community and then you won't have to worry about the sub-prime market anymore, because you'll be out of it. But if you're willing to take a more long-term approach, setting profit parameters with front and back at reasonable numbers and only putting your customers in sound vehicles that they can actually afford, then you will build a strong business. You will be building a "7th profit center" that will continue to generate strong gross and net profits far into the future.

Paul Snider is Senior Vice-President of Business Development for AMN in Boca Raton, FL, specializing in providing dealers with special finance programs.