Over the past 12 months the sub-prime industry has experienced more changes in one year than any of us has ever seen. This is why I felt it was crucial for me to attend the National Auto Finance Association's Annual Non-Prime Auto Lending Conference in Colorado Springs. The annual meeting of some of the country's top sub-prime lenders would provide the best insight into where this market was heading and how it would impact the sub-prime business at the dealership level. Of all the conferences where I have spoken, this conference was attended by the most informed speakers and audience that I have ever experienced. The discussions and questions that arose from the topics presented gave me the answers that I was looking for. From everything I gathered, I feel that two significant changes will emerge over the next two to three years in the sub-prime industry.
It is clear that the sub-prime industry is going to continue to consolidate. The money that once poured into this industry is drying up, making the cost of funds more expensive and thus making it harder for smaller players to stay competitive. Therefore lenders will be forced to consolidate or be driven out of business. However, the lenders that will remain in this field will be stronger and better capitalized, bringing more stability and consistency than ever before. I feel this change will have a very positive impact for dealers. Dealers will not have to be as concerned with the financial stability of the remaining sub-prime lenders and can focus on building long-term partnerships. This will create greater stability and efficiency within the dealers' day-to-day business, allowing the dealer to focus on enhancing and developing sub-prime programs instead of searching for new lenders, chasing receivables, and retraining on new programs. It used to be difficult to establish long-term partnerships with lenders because you never knew how long that lender would remain in business. Now, as the sub-prime market becomes more stable, I believe that both dealers and lenders will become more selective in who they will choose to do business with and will have the opportunity to establish better relationships that will create long-term performance and profitability.
Another observation: The control over the underwriting programs is shifting back to the lender. With fewer lenders in the game, lenders can now be more selective in their underwriting criteria. The sub-prime lenders remaining in this field will compete for a higher quality customer, becoming competitive with conventional lenders on areas like term, rate, advance, down payment, etc. You will see your sub-prime lender's programs become more aggressive in these areas with less discounts and more opportunity for greater advances on backend products like extended service contracts, gap insurance, credit insurance, etc. Lenders will become competitive in used car leasing, extended terms (72- to 84-month financing is already available), offer new ways to capitalize on the Internet customer and offer reserve on top of buy rates. We are already incorporating sub-prime lending programs into the regular finance departments at many of our dealerships. We are training our dealers to see every customer as an individual, with individual needs and circumstances, as neither a conventional customer nor a sub-prime customer. The only thing that is sub-prime is the loan itself, not the customer. You will soon see many conventional customers finance cars through sub-prime lenders due to better rates, terms, advances, lower down payments, etc. You will also see many sub-prime customers finance cars through conventional lenders as these lenders look to take some of this market share. This is why we are training the entire sales, sales management, and finance staff at all our dealerships on how to incorporate sub-prime programs in their day-to-day business.
In order for a dealer to remain competitive in the next two to three years, their entire staff must learn how to operate sub-prime programs. In addition, it will be imperative that dealers see their sub-prime lenders as a partner and not just another vendor or bank. The sub-prime lenders that remain competitive in the next two to three years will be financially stronger and more stable, and they will offer the dealer higher quality programs, faster funding, better service, and more opportunity to increase gross profit margins. Dealers must focus their efforts on establishing long-term relationships with quality sub-prime lenders in order to remain competitive in a market where as many as 60% of the population will rely on financing from these lenders.
Steve Hall is president of Custom Finance Services (CFS), a leading sub-prime management company which develops and manages sub-prime programs for automobile dealers.