Sub-Prime Cuts
Dealer Controlled Finance: Your Improving Customer Profile
By Chris Leedom
It reads almost like a fairy tale. Once upon a time there was only one option for the credit-impaired customer-buy-here pay-here. Then the sun came up and there were dozens of sub-prime finance companies extending credit to the credit-impaired customer. Then there was a bad storm and many of the sub-prime finance companies went away and the only lenders left were the strong, well-funded, buy-here pay-here operators.
This story may be an overstatement, but not by much. We are seeing a trend where more and more customers who were formerly approved and financed by sub-prime lenders are being turned down by those same lenders and are subsequently approved and financed by the buy-here pay-here operator. Remember the article "As the Pendulum Swings." I have had more dealers come up to me at conventions and seminars and say "that article was dead on." But can we prove this claim? I believe so.
Last year one of my buy-here pay-here 20 groups did a study that I believe is an indicator of the above trend. We examined a large number of consecutive applications for several dealer-controlled finance operators from March 1998, September 1998 and March 1999. We needed a method to measure the quality of these applications without introducing the reviewer's objectivity. To do this we examined the average Beacon score for each grouping of applications. The result was an average Beacon score for the entire population of applications of 508 in March 1998, 515 in September 1998 and 531 in March 1999. This appears to indicate an improvement in the quality of applicants coming through the front door.
We surmised that as more and more sub-prime companies tighten credit and decline more consumers, these applicants are returning to the dealer-controlled finance operator. But how has this changed the customer?
These customers now demand more options and a better purchasing experience. Because many of these consumers were previously approved by sub-prime lenders for $10,000, $12,000 or maybe $15,000, the type of vehicle they wish to purchase has changed. You can no longer offer an eight- to 10-year-old vehicle with 120,000 miles and expect to compete. The dealers who are capitalizing on this market shift are able to finance vehicles in the $6,000 to $9,900 retail price range.
Additionally, the customer expects more out of the purchasing experience. In the old buy-here pay-here days, the quality of sales process for the customer was often less than favorable. Today, if you do not treat them right during the sale, another dealer will-and consequently earns the customer's business.
So if you are in the dealer-controlled finance business, take time to examine your current situation. Track your average Beacon (credit profile) scores over a period of time. Examine your quality of inventory. Examine your sales process-how do you treat the customer? Develop a strategy so your business may benefit from these current trends. I have always believed "you have to chop wood when the choppin's good."
This will remain a very hot topic for Buy-Here Pay-Here dealers. So for now, good luck and chop wood.
Christopher M. Leedom is a Professional Twenty Group Moderator with NCM Associates of Overland Park, Kansas. He is a recognized industry expert on sub-prime finance and is the Chairman and Founder of NCM's National Special Finance and Buy-here Pay-here Conference. cleedom@dealeronline.com
