|How important have indirect retail installment sources become to the automobile industry? This day and age, as sport utility vehicles break the $70,000 and $80,000 barriers, it is rather an inane question. However, 25 to 30 years ago, the question may not have seemed so ridiculous.|
Having a solid block of finance sources (which includes sub prime and leasing companies as well) not only makes the difference between delivering a vehicle or not; but has a significant impact on gross profits – whether it be the ability to finance the agreed to selling price, or the aggregation of all associated products sold in the finance and insurance office.
For small to medium sized dealerships (selling less than 200 units per month), the search for the optimum array of finance sources is usually ongoing. It often seems to be a never-ending maze that sometimes leads to cherished opportunities and at other times to abrupt dead ends. Some organizations wrap their collective arms around a few select companies and develop long lasting relationships. Others continually search for that next great finance resource that may give them the leg up on the competition.
“I can’t begin to count the calls and e-mails I get from enterprising dealers and their employees looking for the ‘hot ticket’,” states Special Finance trainer Greg Goebel. “Everyone wants to know who is best. The best fit for one organization may well not even be in the mix for another, depending on sales scope, inventory mix and the sales process. I always tell people looking at the retail lending environment that it is like looking at the ocean. You have high tides and low tides; sometimes you are riding on top of the waves and sometimes you are in the troughs. A lender’s aggressiveness is fluid and based on a number of factors. Embrace the strong relationships that you possess, and then look for additional lenders that will add more diversity to your existing business mix.”
So from a dealer’s perspective, how many finance sources is the ideal number to have? Especially, when bringing sub prime finance sources into the equation, when should a dealer add another retail installment finance source to his existing mix? What should a dealer look for in additional financing options? Ultimately, how do the answers to these questions impact your relationship with existing finance sources? Finally, what do finance sources expect from their relationships with dealers?
In answering the first question, you will likely get as many different answers as the number of dealers that you ask. It seems that the opinions run the gamut. Actually, there are very few dealerships that operate with just one or two exclusive retail finance sources. They are most always a higher volume single-point franchise dealership, dealing almost exclusively with prime credit customers, where the captive finance source does a very good job of buying deeper into the non-prime credit spectrum. These dealers feel extreme loyalty to their captive financing units and are generally rewarded accordingly.
An example of this opinion is viewed by Craig Richards, Business Manager of Lassen Pontiac-Buick-Cadillac, Battle Creek, Mich. “Lender relationships are the backbone of the business office. They not only result in getting that marginal deal approved and generally lead to improved back end profitability. To keep those two factors sharp, I limit the number of lenders I do business with.”
Others take the opposite tact, feeling that with the ebbs and flows in the financing environment; you need to have as many available resources as possible, some doing business with 50 or more finance sources.
When it comes to the sub prime end of the market opinions begin to tighten. How many is enough? What do dealers look for in a sub prime finance source? What is it that allows a sub prime finance source to capture the majority of a dealer’s business?
Stuart Landsverk, general manager of Russ Darrow Mazda-Suzuki, Greenfield, Wis. offers, “We spread our business out. No one lender gets any more than 20 percent of our business in a given month. It's not ideal, but our lenders want to buy in their niche and don't want to see it all. “
Landsverk continued, “Factors to getting more business include quick callbacks, large advances, competitive interest rates (including participation and back end opportunities) and funding times. A good rep can help get business, but ultimately, it's the people who push the "A(pproval)" key who are the ones we deal with. Our top lenders are Wells Fargo (advances and consistency of buying), Bank One Custom (flexibility on tougher deals), Centrix (most consistent, and generous open back end opportunity) and Capital One (great with thin files or high DTI's).”
That opinion is echoed by Mark Greenberg, Burt Automotive Group, based in Denver, Colo. “[In] sub prime lending, key factors are callback time, optimum advances and funding time. Without all of these major areas, sub prime would not be beneficial.”
Richards agrees, “The factors that keep me using one source the majority of the time are better approvals, quick response time, timely funding, great people to work with and excellent service. I've been using my main source (AmeriCredit) for over six years.”
While independent dealers would not disagree with their franchise brethren about key needs, they pause to add an important additional consideration – the simple willingness to do business with independents. Often independents run their operation at or above the levels of franchise dealers, yet are passed over due to not having a franchise sign in front of their property.
Bill Elliff co-operates Elliff Motors with his brother Larry in Harlingen, Texas. It was founded in 1944 by their grandfather Luther Elliff. With 60 solid years of history, in business long enough to no longer need a floor plan on their rather significant inventory, they still feel scorned by finance sources willing only to work through franchise dealers. “It is tough when you are an independent. We are essentially discriminated against for not being franchised even though we have been in business forever and are extremely solid financially.” Fortunately, they do have access to Wells Fargo Auto Finance, U.S. Bank, Bank One, AmeriCredit and Arcadia, which they list as their top prime and sub prime finance sources.
Elliff still feels the bitterness over the day, when after doing business for 14 years with Bank of America and having loss ratios of nearly zero, their representative stopped in and said, “We are sorry, it has been decided we are no longer doing business with independents.”
“It cost us dearly,” said Elliff. “Once that has happened, you always live in fear that the same thing can happen again.”
In order for finance sources to be able to provide the desired superior levels of service to their dealers, relationships must not only be profitable to the source as well, but in step with their business philosophy. Valued dealers and their employees take heed to such obligations.
Centrix Financial is a sub prime finance source based in Denver, Colo., and highly regarded by their base of over 7,000 dealers. Owner and CEO, Robert E. Sutton, offered, “When I started this company, I vowed to build a new model to attract strong financial partners, as well as strong dealer partners that would treat customers as we do, with respect and to establish long-term relationships. We aren’t looking for dealers looking for the one-time score.”
When asked if it was important to Centrix for dealers to maintain a good loss ratio, a high percentage of booked deals compared to those submitted and a high percentage of booked deals compared to those approved, Sutton replied, “Certainly, that is just plain economics. However, we are looking for more; we want an honest, ethical and financially strong partners that will represent us well. Again, that type of partner will help us build long term relationships with our customers, and that is what our model is built upon.”
Past the diverse perspectives offered by franchise dealers, independents and the finance sources comes yet another blind turn in the maze – credit unions. For years depending on the dealership, credit unions have been either one of their greatest annoyances, or a valued ally. Most every dealership has faced the situation where a customer, who opted to go to their own credit union for financing, returns to the dealership to pick up their deposit because “The credit union told them us we were paying too much.”
With low buy rates, free credit life insurance, free GAP coverage, low cost extended service contracts and many providing some form of counseling to the buyers, credit unions have challenged many thousands of dealerships’ finance and insurance personnel over the years. Over time, many dealerships have turned to the credit unions seeking indirect finance source relationships, figuring it was better to join them rather than fight and lose the entire opportunity.
Ultimately, it is from that same credit union base that dealers’ newest opportunities are emerging – both for prime and non-prime credit customers. Credit Union Direct Lending (CUDL), located in Rancho Cucamonga, Calif., has emerged onto the scene and combines credit union financing on a Web based platform for auto dealers. Working together with auto dealers, credit unions are becoming a major resource for financing and for easy member access.
The California Credit Union League and The Golden 1 Credit Union created CU Direct Corporation in 1994 with the vision of providing point-of-purchase lending to the credit union community. CU Direct Corporation (CUDirect.com) is now owned by 28 credit unions and credit union organizations, and offers the Credit Union Direct Lending program to credit unions and auto dealerships in eight states, and spreading.
Dealers can access a large network of credit unions on one easy-to-use platform and get immediate financing decisions. This quick and convenient approval process gives dealers control of the deal, high CSI and the ability to offer credit union financing to members. Dealers receive an administration fee from the credit union, have first rights to sell Mechanical Breakdown Insurance and the ability to increase income through additional products (CUDL GAP, Auto Buying Program).
Both franchise and independent dealers alike using CUDL report aggressive buying, low interest rates, yielding low customer payments and high gross profits. Ben Donnarumma, president of All-Star Auto Sales, Marlborough, Mass., exclaimed, “CUDL has been an unbelievable boost for us. It has been a great deal for our customers and more importantly, let us put together some strong deals that we would have never been able to compete for in the past.”
Affiliations with credit unions are also a significant factor in Centrix Financial's business model, which differs significantly from the traditional approach to the Special Finance market. According to Sutton, “Centrix does not make auto loans itself. Rather, the company has developed a national network of financial institutions to fulfill financing needs. By working with retail finance institutions to make loans, as opposed to relying on outside investment to generate a capital pool, Centrix is able to offer a secure and efficient source of capital to automotive dealers.”
Centrix's servicing and collections ensures the performance of the loan portfolios and minimizes the financial institutions' investment of time and money to manage their special finance activities. The efficiency, security, consistency and profitability brought to the lending process through Centrix 's model allows the Company to offer borrowers competitive financing and a staff dedicated to helping each customer maintain ownership of their vehicle, which helps improve their overall credit situation. Centrix is now available to dealers in 40 states.
The one consistent factor in the lending environment is that it is always fluid, ever changing. With mergers, buyouts, restructurings, failures and new innovative entries into the market, not to mention the effect of fluctuating interest rates and cost of money to the finance sources, all parties understand that what exists today is not at all like the past and will change yet again in the future.
When asked how the Special Finance market has changed in the past 12 months, Sutton commented, “I really don’t think there has been a lot of change. We, at Centrix, are trying to change the market to be much more customer focused. With issues and concerns being raised about predatory lending, similar to what took place in the mortgage industry a few years ago, we are trying to be proactive, working to take care of the customer through the dealerships and our own company. The market, however, has remained pretty consistent.”
Greenberg agrees saying, “[There have been] no major changes, however, sub prime lending has taken a closer look at the people and have a better understanding for people who are not credit bandits.” Landsverk sees it a bit differently countering, “We've definitely seen a tightening in the sub 540 range. It's been difficult to make deals profitably in that range versus a year ago. If a deal is bought, we're paying more fees and having less of an advance to work with and/or lower payment calls.”
Whether the metaphors are mazes or oceans, the lending environment plays a major factor in ongoing dealer profitability. The common threads are that there is not one single clear-cut path, and dealers tend to place more value on these relationships today than they did in the past. All dealers questioned did tend to agree – don’t forsake today’s relationship for tomorrows, as no one knows what tomorrow will bring.
Vol. 1 Issue 4
Auto retail veteran and F&I products expert Paul McCarthy has joined AUL Corp. as vice president of national sales.