Prime, Sub-prime and Special Finance. These are the three categories of customers that come to your store everyday. Whether you know it, or like it, your salespeople know which category of customers your finance staff can contract. The sales people also know if you have vehicles in stock to match these three categories of customers. If you don’t have a managed floor, you won’t even know these customers were at your store (“counting all your ups” is a whole other story)!
Sub-Prime includes B and C credit categories, but dealers often call it Special Finance. Special Finance is really the D, or the “Buy Here Pay Here” (BHPH), category. BHPH is the fastest growing segment of the car business because the industry is evolving to handle this risk level. Dealers across the country are looking at BHPH as a new profit center with tremendous referral potential and as an opportunity to increase their percentage of repeat business. Many BHPH customers actually improve their credit and return to upgrade (especially when you follow-up on sold customers).
Do you know a BHPH customer profile when you see one? Some characteristics might be: Local to the area, shows a continuing pattern of employment, makes enough money to afford a payment, has a down payment commitment and has no credit or credit so bad no conventional finance company will buy him. Are you prepared to set up your own collection company and get in the collection business, or would you rather just sell your paper, “non-recourse?” Most dealers see the potential in BHPH but would rather not get in the collection business. Well, good news: there are several companies in the market that buy BHPH type paper.
So, how do you operate a store to capture the BHPH, Sub-prime and the Prime customers? Assuming you already have finance sources for all credit levels (A, B, C, and D) in place, let’s look at how you handle the types of customers differently. For D-level credit (BHPH), you need to reverse-sell the customer, similar to how the real estate business has done it for years – pre-qualify the customer, then land them on the home they qualify for.
On the car lot, it starts with the greeting, “Welcome to XYZ Motors, Are you here about the big sale or the Fresh Start financing?” The A and B customers will ask about the big sale. C customers may require deeper investigation for proper pre-qualification, while D customers will usually ask for the Fresh Start financing because they know they need help. Escort that customer directly to the credit application. Don’t show cars, quote prices or investigate needs; go directly to the pre-qualification (credit application) and rapport-building step. Only then will you have all the necessary information to direct the customer to a vehicle you can sell to them with their credit profile, C or D.
C-level finance sources often charge discounts or fees for purchasing your contract. You will need enough gross profit built into your deal to absorb those fees. All D-level finance sources purchase at a fairly substantial discount, requiring you to have the proper deal structure from the beginning. D-level finance sources usually pay around 110 percent of book after discount, which gives you a great opportunity to make average or better gross on a customer you’ve previously been unable to finance. BHPH finance sources are not usually concerned with the age of or miles on the vehicle; instead they’re focusing on you, the dealer. Are you providing the customer with a good car that will go another 30,000 to 40,000 miles? Then, the customer will be ready to trade out, and there you go: an opportunity to sell a car to a previous customer in less than 24 months! Convert them by doing your sold vehicle follow-up!
Because many D-level customers do not have beacon scores, the trick is knowing what a BHPH finance source will pay on a particular customer profile. Online application processes are replacing the traditional way of faxing an application and waiting for a call back. Today, these online systems give instant guidance, making it possible to be aggressive and quick with a “roll” or “no roll” decision.
Regarding inventory, here are some tips: Keep in mind the D, or BHPH, finance sources have limits – typically 36-month maximum terms and under $6,000 “check to dealer.” This means the average inventory stock value should be in the $3,000 to $4,500 ACV (actual cash value) range. Domestic and Korean cars (Ford, GM, Chrysler, Kia, Hyundia) tend to be good choices in that ACV range. A good inventory manager should be able to stock inventory with these units at a price point that works for everyone – the dealer, finance source and customer. Although Hondas and Toyotas are the most sought-out vehicles, they typically are the most difficult for these programs because you can’t buy them back of book, which limits gross profit potential.
D-level customers need reliable transportation. Sell the value of credit, affordable payments and the ability to finance them with the down payment they have. Remember, any customer can buy any car. They just need a bigger down payment; then, you can qualify them for 24 to 36 months financing with affordable payments and the opportunity to establish credit.
You already have the customers; start turning them into car deals! Educate yourself, and get paid for it!
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