|Do you remember when every dealership that obtained an approval from a lender received the same buy rate? It was easy for you to start and finish a deal; if the lender bought the deal, you knew the buy rate.|
Now, credit-worthy and credit-challenged customers received completely different retail rates, determined only by their tolerance for pain and their level of knowledge about the finance industry in general.
Eventually, indirect lenders solved the problem of being pushed into higher risk loans by automobile dealers who threatened to move all their business if the lenders refused to finance credit-challenged customers.
The answer was obvious: Simply change to a pricing model that numerous other industries – including mine (insurance) – have used successfully for many years. They adopted a variable wholesale (buy) rate structure that would increase (or decrease) based on the likelihood of the loan going to collection and/or being written off as a loss.
This variable buy rate allowed the lender to accept a wide range of quality customers and make money on the portfolio. It eliminated many arguments between F&I managers and lenders. For the most part, F&I managers assessed the quality of the customer's financial record based on the information provided through his or her credit application and the credit bureau report that was pulled. The only thing left to determine was interpreting this information and its impact on the buy rate.
All these issues disappeared with the implementation of credit scores. Banks simply created a matrix of the customer’s score to a specific buy rate; the higher his or her score, the lower his or her rate. The conversation – and the F&I manager’s input – was no longer necessary – or so we thought. It seemed like there was no control over whether a deal was bought, or the buy rate assigned to it.
This is far from the truth. The conversation doesn’t have to cease, but the topics should change. Instead of, “They are really good people,” or “I really, really need this deal," we need to use the available information and our relationship to leverage more – and better – deals though our lenders.
Know your banks. By knowing your lenders and how to leverage your relationships with them, the research you have done will give you more than just a credit score to discuss.
Determine which bureau(s) they use to collect information because credit score analysis will vary depending on the particular source, which will then affect the rate tier. It just makes sense to have access to the information your lender is reviewing.
Know who your buyers are. Become familiar with them and have contact with them often (in person if possible). It is more difficult to say no to someone you like; familiarity breeds success.
Become familiar with each lender’s statistics. Today, this is relatively easy because many stores utilize Dealer Track. All the information you need is at your fingertips. "Look to book" is one of several ways you are judged and how you can judge them. Determine how they count a conditioned deal. Many conditioned deals are nothing more than rejections in disguise. If the stipulation is $10,000 down on a $15,000 unit and the customer only has $200, is that a workable condition? This may make the bank appear to be giving more than it really is. It could dramatically skew your look to book as well. Know your true turn-down ratio.
Be in tune with how each lender’s portfolio is performing. Good performance will strengthen your ability to get marginal deals done. In a well-performing portfolio, a 750 score needs a 625 to go with it. We sometimes give the 750 to the lender that will only take these good deals. We get another half point of reserve to make a couple hundred extra dollars only to lose the 650 deal completely with a thousand or two of (front and back total) gross.
Know your customer. In order to provide appropriate information, you need to know details about your customers.
Review the credit application and the credit bureau report with the customer before sending it to the bank. In many sales systems, a salesperson on the floor takes the application or the customer completes it. This is not the best alternative, but a necessary one for certain dealerships’ sales systems or high-volume stores. Regardless of how it's done and by whom, it is imperative that the information is correct. Clear up any confusion while the customer is at your dealership. Items such as gross or net pay income plus any overtime or monthly/weekly bill payments can and do have an effect on the customer’s finance score and, ultimately, your buy rate.
Be honest. Getting caught in a lie with your lender is about the worst thing you could do. Not only will you probably lose that one deal, you may never regain the lender's trust.
Respond to negatives. There may be a reasonable explanation for blemishes in one’s credit report. A sickness in the family, short-term work layoff or identity theft may explain (to the lender’s satisfaction) why a payment was late or not really the individual’s fault. Get the story up-front and submit it along with the application. Overturning the lender's initial decision can be difficult if you wait. It will also show your buyer you care and believe in this deal.
By being proactive in this new environment, you will improve your chances of success by achieving a more positive outcome on each captive finance deal. Proper planning and execution will give you greater control and influence with every lender, and could separate you from others who are not as thorough. It will also improve your chances of increasing product sales because your relationships with both lenders and customers will improve.