Having just attended the AutoDealerDaily.com 2002 Internet Retailing Conference, I came upon a couple of startling discoveries. Among attendees were General Managers and key sales managers from dealerships across the country. While discussing sales processes with a group of them during one of the vendor receptions, discussion turned to the handling of sub prime credit deals in their dealerships.
The first surprise came when I discovered that these talented people from prominent and high volume dealerships, selling many hundreds of vehicles per month, were doing virtually no sub prime business. What business they were doing was simply what the finance manager was able to submit to the near prime lenders, get approved, and after subtracting the discount, still leave enough profit to be able to deliver the vehicle.
The second surprise came when I started talking about working deals backwards in order to maximize the gross, the delivery opportunities and customer satisfaction. I felt like I was being received as if I was talking in a different language. None of these managers were familiar with the process, and it was certainly not being done in their dealerships.
Now for the 20 percent of the dealerships in the country that are actively and positively engaged in Special Finance, I apologize in advance, for the balance of this column will bore you to tears. This is for the sales managers, desk managers and finance managers that are structuring deals every day and are not familiar with the process.
Whether it is the customer or the dealership’s sales team, nothing is more frustrating than to go through the entire sales process of selecting a vehicle, negotiating a purchase price, sitting through a finance and after-sale presentation only to have the deal run aground when the customer’s credit disqualifies them. More often than not, the customer is embarrassed and chooses not to pursue alternative vehicles at the same dealership, and the dealership loses the opportunity. It is a tragic shame considering how often it happens and what the dealership has already paid to get the prospect through the door. The best-case scenario is a reduced gross on the vehicle if the customer is approved through a non-prime lender, after a discount is applied.
The better option would be to have taken a customer statement and pulled a credit bureau at the earliest allowable opportunity, to determine the credit worthiness of the individual. With 50 percent or more of the customers that come into the majority of dealerships being credit-impaired, it allows both the sales desk and the finance office the most favorable opportunity to select the lender that will most likely approve the customer, and structure a deal that will fit their criteria.
An example would be, after reviewing the credit statement and credit information, you feel certain that the customer will only qualify through a lender that will advance 110 percent of invoice or NADA trade value for the vehicle, and 135 percent of the NADA trade including tax, tags and after-sale products. This isn’t a problem if you are aware of it in advance, but, if you have a customer sold on a vehicle and are needing to finance MSRP or more, you are obviously in big trouble.
To continue this example, you would calculate what 110 percent of NADA trade is on the vehicle you are considering negotiating on. If that product, less the lender’s discount, combined with the available money the customer has to use as a down payment (or trade equity) isn’t sufficient to sell the vehicle at a normal gross profit, it is time to suggest to switch vehicles or look for additional money to use as a down payment. Here, the desk can make appropriate suggestions to the sales person, so that the customer is then focused on vehicles that will fit the lender’s criteria.
Next, once you have selected a vehicle that is below invoice or NADA trade, multiply the value by 110 percent. This amount, plus the available down payment, will be the maximum sale price that the lender will finance (also providing the maximum gross profit on the deal without getting any additional down payment from the customer). Considering this is the maximum, you wouldn’t negotiate a deal resulting in a higher sale price, as you know in advance that the lender won’t fund it.
Next check the lenders payment to income ratio requirements. Calculate what the payment will be, based on the maximum term permitted by the lender on the vehicle selected (at the maximum price determined above). Does it fit the guidelines? If so, then calculate the maximum allowable payment to determine the available room for after-sale products. Ultimately, you must keep both this and the maximum 135 percent advance in mind when the Finance Manager presents after-sale products.
Assuming customer ascension, using this process you now have a deal structured so that when contracted yields a deal that will fall within the lender’s guidelines, and provide the maximum gross profit available on the deal. It also staves off the dangerous situation requiring you have to bring the customer back to the dealership and re-contract, which always potentially leads to the deal coming undone … or worse.
For dealerships that have Special Finance departments, this is a process that is a common, everyday occurrence. For those dealerships that don’t, give it a try. It will be an opportunity to add both additional deals, and significant gross to the bottom line.
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