Why is sub-prime so difficult to manage? I am asked this question regularly by automobile dealers, and in many cases, by sub-prime lenders. Sub-prime financing is not difficult if properly managed and treated as the profit center it has the potential to be. As the number of credit-impaired customers continues to grow, dealers are faced with new challenges they must overcome in order to deliver more vehicles and increase market share in a highly competitive environment. Managed properly, sub-prime can and will increase sales and profit. If handled improperly, sub-prime will only serve as another headache for dealers who have enough problems without creating new ones.
New Year's resolutions are often broken soon after being made; however, I believe every dealer should reexamine the sub-prime department and take action in 1999 for success. I have listed below a "checklist for success"-areas which cause most dealers problems in sub-prime financing.
Commitment-Senior management must make the commitment to support the separate sub-prime profit center. This includes advertising, inventory, staff, and training.
Accountability-The sub-prime department must be held accountable daily. The amount of business available today requires reporting and tracking mechanisms that insure success.
Separate Department-Successful sub-prime departments are separate from the F&I department and employ trained professionals who create another profit center.
Education and Training-The sub-prime arena is changing daily and training is imperative. To quote a very successful motivational speaker, "If you think education is expensive . . .try ignorance!" Sub-prime financing is different from traditional F&I and requires ongoing training for all staff members.
Lender Selection-With the number of lenders demising, it is more critical than ever before to select good lenders and build solid relationships. Lenders today track each dealership's progress and refuse to do business with dealers who obtain large numbers of approvals with a low percentage of funded loans.
Customer Interviews-Most problems in sub-prime could be eliminated if managers would take the time to conduct proper interviews! This is the time when every part of the transaction falls into place. Anytime shortcuts are taken and interviews not conducted the deal has problems. Often it is the deciding factor in getting a loan approved or funded. Remember, "Speed Kills!"
Shotgunning of Applications-This method serves no purpose and only hampers the relationship between dealership and lender.
800 Loan-by-Phone-This is a great method of obtaining leads; however, dealers should not submit these applications to lenders until customers have been interviewed and qualifications are met.
Inventory-Stocking the right inventory is the key to increasing deliveries. If the marketplace in which you are located has an average income of $1,500 per month, do not stock vehicles that require payments of more than $350. Lenders normally approve customers for 18% to 20% payment-to-gross-monthly-income.
Advertising-Be careful what you wish for, it may come true! Advertising should be designed to attract qualified customers. It serves no purpose to have 100 prospects that do not qualify based on income and other factors. When dealerships attract customers through advertising who do not qualify, it hurts morale and sends a negative message about the sub-prime department.
Funding-This can create serious cash flow problems if not managed properly. Employ a trained clerk to handle all funding. This person should be paid based on the number of days it takes to receive funds from lenders. Sub-prime managers need to spend their time working with customers and delivering vehicles. The cost associated with a trained funding clerk is nominal compared to the cost of money not collected. Dealers should review the contracts in transit for sub-prime daily with the funding clerk.
Customer Delivery and Follow-Up-When customers are delivered properly, the probability of after-sale problems decreases and the number of good referrals increases. Sub-prime customers can and will account for a high number of additional sales through referrals.
Obviously there are additional areas that impact success or failure; however, the ones listed here serve as a great starting point and daily checklist. Sub-prime financing is here to stay, and dealerships who make the commitment and pay attention to this department daily will reap the benefits of an exciting, growing new profit center.
Paul Snider is President of Voisys Financial Services, a subsidiary of VOISYS Systems Corporation, specializing in consulting and loan by phone services. If you have specific questions or require more information about this subject, please check the appropriate box on the reader response form on page 3.