Is Sub-Prime a Fad or Real Profit Center?
By Paul Snider
During the early '90s, dealers across the country embraced sub-prime financing and spent many dollars building special finance departments. During the same period, many specialty finance companies opened and purchased loans that everyone knew would not perform. Yet because of the potential profit from interest spreads and discounts, they continued to fuel the economy by placing customers with previous credit problems into vehicles they could not afford with little to no down payment, creating a new profit center for collection centers, recovery companies and auctions.
While this was taking place, aggressive dealers were building well-defined and professional special finance departments with national lenders who understood the sub-prime finance business and did not look at the market as simply a fad.
Today, these dealers and finance companies continue to prosper while providing a valuable service to customers who have experienced bad times resulting in credit problems. Why were many so successful while others miserably failed? The answer is simple: commitment and accountability.
During the 1996 NADA convention, I conducted workshops on special finance with emphasis placed on those two key areas. Now, four years later, successful dealers follow the basics and put emphasis on commitment and accountability while others ask what happened!
Customers with credit problems have not gone away; on the contrary, the market continues to grow due to medical problems whereby HMOs do not always pay, combined with an increasing number of divorces. What has changed is the way this customer seeks financing. Today customers with credit problems are no longer afraid to seek alternative methods of financing via the Internet and 800 lead generation services. In addition, many traditional prime lenders have developed programs whereby they offer finance packages for customers who have demonstrated the willingness and ability to pay for automobiles regardless of past credit histories. This shift poses new challenges for dealer finance departments and will require a new level of commitment and accountability. The following will define how dealers can meet these challenges and increase profits from an additional profit center and define areas senior management must target for success:
Commitment:
- Separate advertising budgets designed to provide quality sub-prime leads via 800 services and Internet.
- Training for all staff members to address the ever-changing sub-prime customer.
- Inventory that will fit the demographics of customers in the market. Lenders base approvals on percentage of gross income; when vehicle prices exceed customers' monthly payment, approvals delivery will not happen.
- Conduct proper interviews to increase approvals and customer satisfaction.
- Commit to lenders that fraud and misrepresentation will not be tolerated by dealership.
- Provide sub-prime customers a quiet and professional place to conduct business at the dealership.
- Commit to building lasting relationships with credit-impaired customers who will continue to return for service and future purchases plus quality referrals. Remember, when customers are treated properly and sold vehicles they can afford, the result will be a customer who re-establishes credit and returns to the dealerships for future purchases with better credit than before.
- Commit to treat customers with respect and dignity regardless of credit history.
Accountability:
- Require reports that properly track the special finance departments' progress weekly.
- Hold managers accountable for meeting and exceeding pre-set percentages in the areas of appointments that show up, write-ups, approvals, deliveries and profit.
- Follow funding time and ensure procedures are in place for quick turnaround on all contracts, plus adherence to policy pertaining to fraud and misrepresentation.
- Weekly training sessions must be held by special finance professional or representative of finance company with all staff.
- Review loan performance with lenders. This will enhance the dealerships' relationship and, in many cases, increase approvals and decrease funding time.
- Hold the special finance department accountable as a true profit center by involving the director in weekly management meeting with other managers and directors.
In closing, sub-prime is not a fad and will continue to be a very important profit center for dealerships during the coming years. How you approach this customer and this department will be the difference between continued success or miserable failure.
Paul Snider is President/CEO of CreditIQ.com Inc./VOISYS Systems Corporation of Clearwater, Fla., specializing in lead-generating services including 800 loan-by-phone and Internet applications. psnider@dealeronline.com
