It’s the time of year when collections become more of a focus. While it’s always a focus in our industry, the holiday season seems to refocus our efforts a little bit. November and December do seem to be the toughest months to collect.

November and December seem to be challenging sales months for some dealers as well, at least for those who don’t start their tax season promotions a little early. These are two very good reasons to make sure the deals you are structuring are sound.

Sound deals start with the term. It has to make sense. A low-ACV unit on a long term just because we got a good down payment doesn’t make sense, not because the car won’t run the note, but because the customer won’t run the note. Less than half the deals we put on the books in our industry go to term. Almost a third will charge off, and another 20 percent will pay off early either through our repeat programs or from our competition.

Term should be dictated by two factors: what the customer can afford based on their verified net income and your appetite for exposure. If the customer can afford a $300 monthly payment and you are only comfortable with a 30-month term, then that customer’s total contract can only be $9,000. So you can sell that customer any vehicle on your lot as long as they leave owing you no more than $9,000 in principal and interest.

Obviously, since payment is an integral piece of establishing term, it is also an important factor in sound deal structure. What we are looking for here is the same as what we are looking for  in term. It has to make sense. The payment has to make sense from the standpoint of when it is due. The first payment should be due when the customer gets his or her next available paycheck, barring any deferred downs.

Allowing a BHPH customer to go 30 days without a car payment when there isn’t a deferred down payment involved is asking for trouble. We know our customers have had issues with budgeting money in the past. Why not help them budget better by starting their payment right away? And to help them even further, have their payment scheduled for the day they get paid for an easy reminder; get paid, make payment.

Interest rate is the next aspect of deal structure that has to make sense. Now before I get hate mail, I’m not suggesting you don’t take advantage of your state’s usury limits. What I’m saying is that based on the first two aspects of deal structure that need to make sense, term and payment, you may need to adjust this one. Interest income is our reward for the risk, but if the overall deal structure doesn’t make sense, your ability to collect will be greatly affected.

Back-end or add-on products are similar to interest in the overall scheme of deal structure. They are great profit generators but can affect payment and term, not to mention cash flow. You just have to decide where you want the money you collect from the customer to go: to principal and interest to reduce risk and increase reward, or to recoup cost in a product.

The vehicle is the last thing that has to make sense when it comes to deal structure. Let me give you an example of a deal I came across during a consulting visit. A single mother with four children, two of whom required car seats, was allowed to purchase a Chevrolet Camaro. The dealer’s reasoning was that the customer could afford the payment based on his criteria and the term was within his criteria. Yes, both of those do make sense, but common sense should tell us the overall deal doesn’t make sense. And yes, within the first year she wanted to be traded out of the vehicle because it wasn’t big enough.

The moral of the story is overall deal structure has to make sense not only for you, the dealer, but for the customer as well. Term needs to be whatever your willingness for exposure dictates. Payment needs to fit the customer’s financial ability. Interest and add-ons need not dictate the term and payment, but vice versa (term and payment need to dictate the interest and add-ons). And the vehicle has to fit not only the customer’s financial needs but his or her practical needs as well.

Deal structures that make sense for everybody reduce risk and increase reward. So it truly is all in the deal structure.

Vol. 8, Issue 11 

About the author
Brent Carmichael

Brent Carmichael

Executive Conference Moderator

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