When "sub-prime" is mentioned in a dealership, most people think of a customer who has experienced a great deal of financial difficulty and should be dealt with in an entirely different manner (some dealers set up a trailer out back to get the customer out of the showroom). Many dealers would be shocked to know that this is a $150 billion business and includes as much as 50% of their customer base. In addition, many dealers are not aware of the sub-prime lending programs that have come into the market over the last two years. Sub-prime lenders offer rates as low as 9% while allowing the dealer to hold as many as 4 points of reserve, provide up to 84-month terms, advance as much as 175% of NADA trade-in, and do not require any down payments. This may not sound like sub-prime financing to most dealers, but every one of the dealers we manage is delivering cars on these terms on a daily basis. How are they doing this? There is one simple reason-they understand the true definition of sub-prime.
By understanding this definition, dealers are able to dramatically increase sales and profits by structuring loans that meet the terms and conditions of their customers. Sub-prime is simply a "high-risk loan." It is not the customer that is prime or sub-prime, only the loan itself.
Let me explain myself by giving you a few examples. I see customers with excellent credit come into our dealers every day. These customers can certainly qualify for conventional (prime) financing but are placed with a sub-prime lender because they have selected an older vehicle and need to go a longer term to get to that $250 payment that every customer is looking for. Most conventional sources will only give a max term of 36-48 months, whereas certain sub-prime lenders will grant a 72-month term. There are other situations where the credit is good but the advance the dealer is trying to get is 150% of book value because the customer is upside down in their trade. Many conventional sources advance 100% of retail and this can, in some cases, be $2000-$3000 less than what a sub-prime lender will advance on the same car. Many customers have excellent credit but also have high debt-to-income ratios that disqualify them. They need to obtain sub-prime financing that will allow for these high debt-to-income ratios.
On the other hand, we see customers who have had a great deal of credit problems and at first look qualify only for sub-prime financing. However, with a good deal structure and a big down payment, these customers are being bought by prime lenders. The customer is still the same customer that walked in with all of those credit problems, but many dealers consider the customer to be a different person now that they have obtained conventional financing for them.
The point I am trying to make is that it is not the customer who is sub-prime, it is how the financing for that customer is structured. When dealers stop categorizing customers into prime and sub-prime, and focus on trying to structure the best possible terms and conditions for each individual, then dealers will see sales, profits, and CSI all increase. When the average gross profit of a sub-prime deal is $2700 and as many as 50% of your customers qualify only for sub-prime financing, you better start re-evaluating your current F&I structure. We have the highest divorce rate, highest bankruptcy rate, and highest consumer debt in this country's history-all at the same time. This market is too large to separate.
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. 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. shall@dealeronline.com
Managing 800 Numbers And Internet Leads By Paul Snider Regularly I speak with dealers and general managers about how leads from 800 number lead generation services and the Internet are managed. In many cases they know exactly how many leads were received, percentage of deliveries and average gross profit per delivered unit. Why do busy executives responsible for managing million dollar corporations pay attention to this area of our business? 800 number lead generation services and the Internet allow dealers the opportunity to target advertise and measure results in a very cost-effective manner. The cost of generating leads via 800 numbers and the Internet are low, which leads me to believe that senior management does not consider the importance when developing sales and marketing strategies.
The following are techniques used by successful
dealerships in the area of lead generation:
· Review the dealership's 800 number script each month. Long scripts with unnecessary questions encourage prospects to hang up prior to completion. The most effective scripts contain 10 to 12 questions.
· Implement different 800 numbers and scripts for lease and prime credit customers. Lead generators are not for sub-prime customers only!
· Place successful ads! Advertisements that imply everybody rides should only be used by dealerships who have buy-here-pay-here facilities. Often dealers complain that the leads are no good or cannot qualify. Proper target advertising and script selection prevent this from happening.
· When reviewing scripts pay close attention to the minimum qualifiers, such as income, that you will accept. If your lenders require an income of $1,300 per month, then the script should eliminate customers who do not meet this qualification. A good lead generation service can implement several minimum qualifiers that will keep you from receiving or paying for leads that do not meet minimum requirements. On the other hand, if a large number of your calls are non-qualifying customers, your requirements may be too high. Many customers have additional incomes or long previous job times that can be determined during the interview.
· A good 800 number lead generation service will allow you to selectively choose which area codes to accept phone calls from. This will eliminate paying for leads that are too far out of the area.
· Pay close attention to area code changes in your market. When area codes change dealerships must notify the 800 service to ensure calls are not missed from these areas.
· Study the weekly reports provided by the lead generation service. Effective reports list each call and the media source that generated the call, along with the caller's name and called-from number. Often leads are taken off the fax machine or distributed without a procedure in place for follow-up. Weekly reports allow management to hold staff accountable for each prospect and allow management to track advertising results. Numerous times I have received calls from dealers who thought ads were running on television or radio only to find the agency failed to place the ad or the station did not air the commercial!
· Customers must be contacted immediately after a lead is received. The customer who provides information via 800 numbers or the Internet is shopping and will continue to do so until a professional salesperson contacts them and explains the importance of making an appointment to purchase or lease.
· Be careful of "shotgunning" leads to lenders prior to meeting with the customer. Lenders are quickly changing the rules and terminating dealer agreements when the look-to-book ratio is below standard. Customers are not always 100% truthful and/or omit valuable information. This inaccurate or lack of information may result in a turn down or low qualification if sent in prior to conducting the interview.
· Make sure your dealership and the lead generation service is FCRA compliant.
· Designate a person to manage 800 and Internet leads! Accountability is important.
By utilizing these techniques, you will be more satisfied with your service in addition to delivering more vehicles. Dealerships who have solid procedures, proper advertising and on-going management of leads are consistently successful and continue to increase market share and gross profit.
Paul Snider is President of VOISYS Systems Corporation, specializing in lead-generating services including 800 loan-by-phone and Internet applications. 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. psnider@dealeronline.com