|Full-spectrum finance is a common misused term in automotive finance today. Many special finance lenders make claims of offering full-spectrum finance. While there are hoards of dealers who think they offer the same to their array of customers, they are mistaken.|
Full-spectrum finance means automotive finance alternatives for the full spectrum of customers in your market—not just those with a credit score above 500. It is no longer the exception to the rule in the car business; it is quickly becoming the expectation of every customer who shops for a car, including the buy here pay here customer.
Before I explain, let me define some of the key terms. Basically, there are three tiers in automotive finance. Let’s call these tiers “primary,” “secondary” and “tertiary.” The primary tier is separated from the other two by the prime line, a floating line used to denote the minimum acceptable credit score for a prime customer and breaks the three tiers into two subsections: prime and non-prime. Customers with an established credit score of 650 or better are typically considered “prime” and worthy of an interest rate at or below the prime lending rate.
The non-prime section consists of the secondary and tertiary tiers. These tiers are further separated with an established credit score that is near 520. Many of what are commonly referred to as “secondary” lenders will not finance customers who have a credit score below 520, and most of the industry leaves that segment for the BHPH dealers. However, if you made the commitment and investment to include special finance as part of your business model, this segment is simply too large to ignore and should be included as an integral part of your sales and finance presentation. There are several good lenders vying for the customers in this tier that can and will become important business partners with you.
In order to direct a customer away from specific vehicles, bypass price, ask for significant down payments and still structure profitable deals, you must have a program to sell. In special finance, this program is the hope and a plan for the customer to establish or re-establish a positive credit rating. It is the intangible part of the sale that inspires the customer to act now to improve their way of life. It works well as a closing tool and actually improves the relationship with the buyer. Having a sales program that features the benefits of doing business with your dealership is essential to your success in special finance, particularly as the market continues to grow.
It is estimated that 56 percent of the vehicles sold and financed through automotive dealerships are financed by non-prime lenders. This segment of the market represents over 19 million automobile sales per year and is expected to continue growing for several years to come. Economic forces and competition are driving these major changes in the automobile business, and car dealers across the country are delving into special finance as a result.
However, there is much more required to be successful than just signing up non-prime lending sources and opening a special finance department. Nevertheless, the foundation of your program is your choice of lenders. You need at least five to seven quality lenders who cover the entire credit spectrum.
There are so many good dealers doing business today that the consumer has more choices than ever before. The established BHPH customer of yesterday can now shop at franchise dealerships and even purchase a new vehicle with little money down. The large and successful BHPH operations are also putting customers in better cars than before with lower down payments. These dealers are starting to migrate upstream and include secondary lenders in their finance mix in order to remain competitive and profitable. The point is car dealers of all types need a variety of lending sources that will enable them to offer full-spectrum financing options.
One particular dealer client of mine owns a well established Ford franchise that has been in business for over 50 years. Four years ago, they decided to get into special finance, but were not in agreement among the partners on how to go about it. The senior partner was old-school and stuck in the ways they did business several years ago. He was concerned that the special finance customer might drive away the traditional customers with whom they have done business for years.
Reluctantly, he agreed with his other two partners and the three opened a used car lot at a different location across town. To avoid competing with the coveted Ford store, they agreed to make it a BHPH dealership and finance the customers themselves. This decision was a direct result of the fact that the F&I department at the Ford store had signed every possible lender, including all the key non-prime players. What this owner didn’t realize was that he was already involved in special finance.
In 2006, the Ford store, with 108 employees, netted just over $300,000 including sales, parts and service; their average monthly advertising expense was shy of $90,000. In contrast, their little used car lot just completed its third year of business with a net profit, net of collections and charge offs of over $1.2 million. They had also accumulated a self funding receivable portfolio of BHPH customers worth over $2 million. This store has five employees and an ad budget of only $5,000 per month, and it doesn’t take a financial analyst to determine which investment is generating a better return.
In 2007, the partners agreed to open a two-person special finance department in the Ford store. This department is expected to more than double the net profitability of their franchise store for the year. The biggest headaches they have today are deciding when to turn over customers from prime to special finance and how to turn over customers from special finance to the BHPH store. The problem is there is no smooth transition for customers across their spectrum of finance. As a result, there is constant bickering and competition among the staff as they fight over customers.
This is a common and very costly problem for any dealership that tries to separate the operation, the staff and the customers based on consumer credit scores. A customer is a customer regardless of their credit score, and they are all looking for value, service and the nicest form of reliable transportation they can afford. It is the job of the dealership, as a team, to meet these customers with enthusiasm and confidence and to exceed their expectations to create a better car buying experience than provided by the competition. There is no time to worry about what’s fair and who gets to wait on the customer.
In order to offer full-spectrum finance, you don’t have to start a BHPH operation. Instead, there are several lenders who do a very good job financing customers in the third tier; Credit Acceptance Corporation and Westlake Financial are two examples. The point is, any dealership engaged in special finance needs to offer financing options to customers in the bottom tier with. Otherwise, you are leaving too much business on the table, and too many customers walking out of your store empty-handed.
Full-spectrum financing allows you the ability to offer vehicle purchasing options to every customer who visits your store, regardless of their credit. It removes an important limiting factor from the typical sales process and if done correctly, will help you attract customers for life. Your ultimate success will be determined by your ability, as a dealership, to attract customers, sell quality vehicles, and make financing as simple, seamless and profitable as possible.
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