The New Car Advantage In Special Finance

“We are trying to integrate special finance into the new car side without alienating the prime retail customer,” said Pitman about his new role. Early signs indicate that approach is working fine.

“Through 20 Group relationships, I learned that Suzuki was a very progressive brand that really wanted to grow,” said Pitman, who’s been operating Suzuki of Wichita out of a triple-wide trailer as construction proceeds on his new building. “My goal has been to become a new car dealer, so I went out to figure out which brand [I wanted to represent]. As I couldn’t afford a Toyota franchise, I looked at what brands would go well with the used car customer. I like the blue-collar customer and I wanted to see what brand would offer the most options. Suzuki was high on my list.”

It’s no secret that special finance has become a widely used tool to build used car sales around the country. Massive numbers of credit-challenged consumers who wouldn’t get the time of day from most banks can often get hooked up with high-interest loans in a matter of minutes. They may pay more than good-credit customers, but they have a vehicle. They also get a chance to rebuild their credit with a fresh record of on-time payments.

Today, some low-priced automotive manufacturers expect dealers to use special finance to build up new car sales, particularly for brands like Kia and Suzuki. For the finance companies, there’s the added assurance that their poor-credit customers are driving vehicles right off the lot with lengthy warranties. For dealers, special finance is an absolute necessity for hitting their monthly sales goals, and growing their market share.

The New Car Advantage in Special Finance
Mike Anthony, secondary finance manager at Akron, Ohio-based Van Devere Pontiac Buick Kia, rarely relies on special finance for either the Pontiac or Buick franchises he works with. “We do maybe one Pontiac a month,” he said, “two in a great month.”

Back in September of 2006, his company bought a Kia franchise and special finance has played a major role in building sales to 75 to 80 new Kias a month. That point is not lost in ad campaigns that highlight how credit-challenged consumers can qualify for a loan to buy a new Kia.

“Sometimes we tend to go through spurts where, if we don’t need to hit a certain number for Kia itself, we will go to the used car to make some big money,” noted Anthony. “The Kia markup is not a lot.”

Although not every finance company will finance a Kia, enough will to make it all worthwhile according to Anthony.

“Special Finance is a huge portion of our business, but it is getting a little smaller as Toyota and Honda buyers are coming into our market,” said Ted Rozman of Kia of Clarksville, Ind., which is just across the river from Louisville, Ky. “It’s gone from 80 percent special finance to a third … But it is still huge.”

“You may get a lower rate on a new vehicle depending on the deals available,” he added. “AmeriCredit has deals with Kia, but every deal is almost like a kid. They’re all the same and all different.”

“We do a lot of payment advertising, because it almost always comes down to payment,” added Rozman. “We will also almost always do a 72-month note. We get some people where it’s really surprising. You’ll see some deals get done at 14 percent, and then you see someone who gets 20 percent. We’ve seen some banks tighten up and others loosen up. If Wells Fargo tightens, AmeriCredit loosens up. Lenders go hot and cold and we ride the wave.”

Nonetheless, there is no shortage of lenders in the market.

“Getting them funded, that’s the big thing with us,” said Rozman. “We’re always looking for new lenders. Actually, I hope that it grows a little bit more, because I do believe that there are some deals that we are missing. Some lenders are tightening up at 500 and below. After attending a recent training course by Special Finance trainer, Greg Goebel, I contacted some new lenders in my area.”

Some lenders are responding to the sub prime market for new cars with better rates. Shaving a few points off a sub prime loan can make it easier to put a deal together.

“This came as a surprise to me: Lenders are giving me better quotes on a new deal structure,” said Pitman of Suzuki of Wichita. Those better rates can also translate into a lower number of defaults.

“Mechanical failure is the number one reason why people stop paying a loan,” added Pitman. “With a new car manufacturer – and Suzuki has a seven year/100,000 mile warranty – that excuse goes away.”

At Van Devere, Mike Anthony’s team takes Kia’s warranty one better. As long as a customer owns the car, they have a power train warranty, which helps make each customer a more reliable payer.

Everybody Gets Treated the Same
There is no special finance office at Taylor Automotive, which is approaching its tenth anniversary since first acquiring a Kia franchise in Toledo. Instead, there’s an “assembly line” process for each customer, as an appointed string of personnel submits applications, determines which lenders are most likely to approve a deal and makes sure all the paperwork is done properly as the deal is funded.

“We start everyone with fact-finding and run a credit bureau on everyone,” said Stephen D. Taylor II, the general manager of the Taylor Kia store. “I know some dealers who go through the whole process, selling a $30,000 Sedona to a customer who only qualifies for a $250 a month payment.”

Taylor likes the assembly line approach because it helps make sure that all his customers are treated the same, regardless of their credit rating. When you’re selling new or used cars with sub prime financing, he added, that’s a key point. Most of these customers have already been through the ringer more than once at other dealerships. They’ve been dictated to, told what they can buy in a take-it-or-leave-it fashion, and generally treated in any number of ways they hate. He doesn’t even like to classify each new customer as prime or sub prime.

However, that doesn’t mean Taylor is ignoring the importance of special finance in his business. “If I sold 175 new cars a month, at least half would be considered, in the normal definition, as sub prime,” said Taylor. “Nearly 70 percent of the people in this area can’t get normal bank financing.” Nevertheless, they can go to him and buy a new vehicle.

“People understand they have had credit issues and they know they can still get a new car,” he said. “The Spectra does the best because of the rebates. It’s a $1,000 or $1,500 rebate. It always helps to have some money from the manufacturer, and the Spectra is a nice car with good equipment.”
 
Adding a New Layer of Trust
Kia and Suzuki dealers have plenty of incentive to keep building sales with special finance offers. Both manufacturers compensate dealers based on the sales goals that are set for them. The more they sell, the more they make. The more they sell, the more they’re expected to sell.

“Obviously we have to hit that number,” said Anthony of Van Devere Pontiac Buick Kia. “Big picture wise, that is huge to the dealership. We have to hit these numbers or the dealership loses lots of money. It’s based off of different factors; what we’ve done in the past and so forth. We’ve been number one in this region now for eight months, and we’ve only had the dealership for 14 months. Our numbers have been growing rapidly. We started in the 30s, and now we’re in the 60s to 70s.”

Anthony also isn’t setting any arbitrary limits to how high sales can go. “The sky’s the limit,” he said confidently.

“Suzuki has created a pay schedule based on whoever sells the most, earns the most,” said Pitman. “We get bonuses and the bulk of income based on who sells the most cars. It’s as lucrative to sell new as used, and that is the beauty of the brand. We’re not charging more for the car.”

Special finance is what makes it all work for Pitman. When he’s fully up and running in his new store, the dealer expects to sell half of his new cars to customers who need sub prime loans to stay on the road. Go to the Web site for Suzuki of Wichita and you’ll find quite a lot about the “Scott Says Yes” program. If he can’t get a credit-challenged customer approved, he’ll cover the tab on a steak dinner. He’s not been shelling out a lot of meat money.

“The high credit score customer doesn’t like to talk financing up front,” said Pitman. “But special finance customers are used to being beat up and told no. That customer still wants to get pre-approved and for them we use direct mail, phone hotlines, Internet leads and so on to isolate that customer before they get to the showroom. Special finance dealers are sourcing information and then contacting the customer through the BDC and bringing them in. We tell them it’s not just for used cars; we can sell them a new car. The customer isn’t expecting that.”

Pitman also is working on a business model that calls for sales to split between new and used, so whether the special finance customer ultimately chooses a used vehicle or a new one, he’s still advancing his business. By being a new car dealer, he’s gaining credibility on the used car side of the business.

“Dealers can offer a new car as extra incentive to get them interested,” said Pitman. “When you’re a new car dealer, there’s also an extra level of trust.”

Where the Market is Headed
None of the aforementioned Suzuki and Kia dealers sees this market fading anytime soon.

“Fifty-eight percent of the market can’t walk into bank and arrange a loan for a variety of reasons,” said Pitman. “Everything I read continues to head that direction. We cater to the most number of people we can.”

Big headlines about a weakening economy and a credit crunch don’t faze him either. “First, I’m in the Midwest, so we’re not going to take as hard a hit,” said Pitman. “I am seeing lenders be cautious, but not go away. You have to be a student of special finance, understand it, and be able to switch gears and go to different lenders. We have not seen the banks struggling on mortgages halt or retreat from sub prime loans.”

This strategy isn’t limited to Kia or Suzuki, either, said Pitman. “Anybody that has a new car in the under-$15,000 category can use that car to do special finance.”

On the other hand, you also can’t become so focused on special finance deals that you lose sight of the growing prime business that these brands are attracting, said Taylor. 

“We need to continue to focus on the prime customer,” he said. “We’re advertising credit, but also capturing customers from Honda and Toyota.”

Vol 5, Issue 2