According to the National Automotive Finance (NAF) Association, the nonprime market is currently the fastest growing segment in auto finance, accounting for more than 20 percent of the market. Despite the rapid growth, nonprime loan delinquencies are falling. NAF’s 2006 Non-Prime Automotive Financing Survey showed a decline in delinquencies from 8.3 percent in 2005 to 6.6 percent in 2006.
While there has been a scare in the industry due to the bottom dropping out of the sub prime mortgage market, there are signs that automotive sub prime loans will not share the same fate. Some of these lenders may be looking to scale down car loans, but our experience at DealerTrack suggests that others are looking for a way to replace the diminished loan volume in real estate lending, both prime and nonprime.
With a rise in sub prime demand and plenty of willing lenders, it’s important to figure out which candidates will become profitable, loyal customers. Many of these prospects have a beacon score below 600, making them ineligible for most prime loan programs. Their deals typically have longer loan terms, lower down payments, higher loan-to-value ratios and higher retail turn rates.
The time is right, and the market is right. The question you need to ask yourself is, is the buyer right? Not just any customer is the right candidate for your sub prime program. This type of loan can be uncertain; it takes staff training, a solid software partner and a skilled eye to determine whether the benefits outweigh the risks.
A recent Consumer Bankers Association (CBA) survey showed that the average bureau score for new vehicle buyers has decreased, while the average bureau score for used-vehicle buyers has increased. The results of the study point to a growing trend: sub prime and used-vehicle buyers are finding the benefits of a good used car may outweigh the benefits of a pricey new one. In addition, if those buyers’ scores are increasing, profit from a well-thought-out sub prime department may be the relief dealerships are looking for as new vehicle sales turn sour.
So, what are some things to look for when determining whether a candidate is right for a sub prime loan? First, understand that a slow-pay customer still wants options. Teach your sales reps to ask the right questions when it comes to down payment, monthly payment and loan terms. Also, ensure your finance manager knows how to properly desk these deals, which lenders require what information and how one lender compares against another. This is an area where sub prime solution tools can become extremely valuable.
Dealerships that effectively use software tools are reportedly seeing sales jump from 20 vehicles per month to more than 100 vehicles per month, with many grossing more than $2,500 per vehicle. DealerTrack SalesMaker™ is one of several tools on the market that enables dealers to integrate sales, finance, inventory and desking to match the right vehicle to the right buyer. You can get multiple quotes in seconds and side-by-side deal comparisons, allowing you to determine which deals will be most profitable for your dealership and best for your customer. By quickly structuring any deal to fit the customer’s needs, you can achieve increased closing ratios and maximize your profits.
The software can help your dealership compare and contrast the terms and options available, as well as provide side-by-side comparisons of vehicle and payment options, so you and your prospect can determine the plan that best fits their needs. In addition, you can track the process from start to finish.
Accuracy, time savings and simplicity are important when desking any deal, and using a software solution can help you achieve these benefits. Working a deal for any prospect, prime or not, can be a confusing process, but when you add in the special needs of a sub prime candidate, it’s easy to get lost in the details.
The more informed your customers are, the more likely they will choose reasonable financing options that enable them to make monthly payments, adding to your bottom line. While sub prime is not the elephant in the room it used to be, there is still an aura of mystery around this profit center. As it continues to heat up across the automotive industry, I encourage you to learn more about this often-misunderstood business and determine whether it’s right for your dealership. With the right people, processes and tools in place, it can become a powerhouse for profits.
Vol 5, Issue 8
Vehicle Administrative Services is now the exclusive roadside assistance provider for service contract administrator AUL Corp.