Lining the deal, switching the customer, landing in stock, getting the bump, closing the deal, getting it bought, collecting all lender stips and getting the deal funded. These are just a few of the things that contribute to each and every subprime deal that a dealer delivers. Just when you thought special finance couldn't get more complicatedit already has!
It is said in commercial real estate that there are three things that contribute to the success of a business - LOCATION! LOCATION! LOCATION! Well, in the art of special finance the very first three things on the list would be; INVENTORY! INVENTORY! INVENTORY! Considering that up to 70% of all subprime customers are buying used cars, it is critical for dealers to understand the bridge between used car inventory and subprime lenders.
Secondary financing offers huge rewards and profits to those who know how to work the numbers. It is not uncommon for subprime lenders to advance up to 115% or more, relative to book plus tax, license and fees. In fact, a few lenders will advance a line 7 of 150% of book. Remember the early days of subprime when banks would limit the special finance customer to about 80% of book? The subprime advance has without question advanced - the real question is, have we?
In today's real and complicated world of special financing, understanding individual lender parameters is one thing (i.e., mile restriction, age of car, term of contract and APR just to name a few). But all of that knowledge is equal to zero if your inventory is not tailored to your subprime's two most important customers, the retail customer and the lender! Case in point: I met a used car manager who was ecstatic about the fact that he picked up a Pontiac Grand Am for about $2000 back of book. Being back of book is great but let's take a look at the bigger picture. This particular car had over 90,000 miles on it and was a 1995. Number one, there's no trick in buying a car like that back of book. Number two, since the miles are so high, you'd be lucky to get a call of 36 months on the contract, 42 if you push it and 48 if the banker is your mother. The bottom line is that because of the age of the car relative to its miles and term, on a 36-month note, this "back of book" car now represents a debt to income problem with the bank. Chances are that the average subprime customer cannot afford a payment of $600 per month, in short the car is SALE PROOF! Here's the big question, "Did the used car buyer know that this particular car was wrong for the secondary lenders parameters when he bought it?"
Believe it or not, the scenario I just described happens everyday. While there are many opinions on how to fix the problem, I offer one that works. In the July/August edition I wrote an article entitled Educate Your Staff, written to address the need of educating the managers on the desk. Using that same philosophy, doesn't it make sense to insure that the person who buys the product for your special finance venture understands what kind of product is good for the customer, the bank and the dealers bottom line?
As a seasoned special finance manager I can say that I've been there. I've seen my staff and myself sweat blood to make sure that the car we sold represented the maximum amount of profit for all of us. If your staff has the talent to produce profit for your dealership, back up their talent with the right inventory. Pay close attention to the concept of The Lenders Inventory.
To increase your chances of success make sure that the person who buys your inventory knows the answers to the following Lenders Inventory questions.
What are the ideal miles a car should have for your lenders?
How old a car can each of your lenders finance?
How does each of your lenders determine the contract term for the subprime loan? Do they assess it by miles, age of the car, amount of line 7 or a combination of the above?
What is your special finance department's average bank fee?
What are the hottest selling cars, trucks or vans in your subprime marketplace?
Do you have lenders that will not deduct for high miles?
Do you have lenders that will give you an add or a full add for miles?
What percentage of your subprime business is ranked as "F" paper?
What is your customer's average income?
What is your customer's average downpayment?
These questions, coupled with the basic inventory balance knowledge that your used car buyer should have already will help your special finance business have a well-balanced "lenders inventory" which in turn will equate to a healthy profit margin. The bottom line is that a dealer's subprime inventory can literally make or break it. The days of cash buyers and gold credit bricks are behind us. In fact, over 60% of all franchised dealers in the country send a large percentage of their deals to subprime lenders. In the world of special financing you are either following the pack or leading the game. One of the most critical elements in a successful special finance venture is the right inventory. Your success in this booming industry is determined by how well you and your staff pay attention to Lenders Inventory and how quickly your company can adapt to the ever changing credit profile of your customer base.