May 06, 2001 18:24:44
Good Credit, Bad Credit, Don't know. What do you do?
National Product Marketing Manager of DealerLink
Every day, Sales and F&I Managers struggle to help customers who have bad or marginal credit. It can be difficult to identify “credit-challenged” customers because they look like everyone else and, in fact, they are like everyone else. Often they are regular people who have lost their job, experienced an expensive medical problem, went through a very costly divorce, or had financial difficulties by thinking they could “pay off a credit card with a credit card.”
Trying to instantly determine a customer's credit situation can be embarrassing and difficult for both customer and dealer. The best way to manage these situations is to be prepared for the inevitable -- that over 58% of your customers will have the type of credit that requires extra effort to get them approved for an auto loan. Every dealership should have a process in place that is similar to the mortgage industry's “How much house can I afford?” process. This will allow you to properly interview a prospect to uncover their ability to pay and their credit worthiness. Then you can pre-qualify that customer with your lenders, both primary and secondary, and give them the opportunity to purchase the best vehicle their credit history, current debt-to-income ratio and down payment will allow.
Primary lenders base their decisions for approvals, programs and rate factors on credit scores. A higher credit score means easier approval and better rates and programs. In some cases, to accommodate a larger dealer, they will “buy deep” hoping to get a greater mix of the dealer's “A” paper. Usually this is at a price -- whether it be a smaller advance, bank fee, discount fee, rate, or other – thereby resulting in a lower profit margin for the dealer.
Today, with the captive lenders “buying deep,” the average dealer assumes that this is the best deal for the dealership. They may feel that this not only simplifies things, but also gives them an edge with the captive lenders. In reality this practice could be very expensive for the dealership. Finance Managers may be more concerned with getting the “marginal credit” customer bought through their primary lenders than researching more profitable opportunities available with other lenders, including secondary lenders.
One reason that this happens is that many finance managers believe secondary lenders are exclusively for people with bad credit. Actually, most secondary lenders like getting deals from people with marginal credit (vs. bad credit) and most have very profitable programs available to accommodate this growing market segment.
Let's take a look at this example. Let's say we have a customer, Mr. Smith, who has a credit score of 600 (marginal primary or great secondary). Mr. Smith wants to purchase a car with an NADA Trade Value of $11,050 and NADA Retail Value of $13,375, a cost of $10,900 and the dealer wants to sell the vehicle for as much as he can. A primary lender might take this customer at 80% of NADA Retail ($10,700) with a 10% down payment at 11.0% interest rate. The dealer would make a gross profit of $800. However, a secondary lender will take this deal at 115% of NADA Trade Value ($12,707), a 10% down payment, and an 11.0% interest rate with a resulting gross profit of $1,807. The second option offers an additional GP of $1,007 is clearly more profitable for the dealer.
Another reason finance managers may not examine all available lender opportunities is due to the time and effort involved. Because of the complexities of secondary lender criteria, it is often easier to take the path of least resistance and send the marginal credit deals to primary lenders. Managers may fear that the customer “will walk” if they do not get the approval handled quickly. However, there is a solution that makes it quick and easy to find the most profitable deal.
Using today's available software technology, Sales and Finance Managers have the ability to quickly and accurately evaluate marginal credit deals against both their primary and secondary lenders. Managers can now use software loaded on their desktop PCs that is attached directly to their in-house DMS systems. They no longer need to manually research and calculate lender criteria or use multiple computer systems to verify and compare customer and vehicle inventory data to ensure that profitability is maximized on every deal. Once the Sales Manager finds and creates the most profitable deal, they can save and transfer it directly to the F&I Manager for finalization without having to shuffle paper or re-key deals. The needs of the customer are handled quickly and efficiently to ensure more profitable deals in less time.
“Credit-challenged” customers will continue to be a large segment of a dealership's prospects. By having a process in place to handle these customers in the quickest and least embarrassing way, taking advantage of all possible lender opportunities against your vehicle inventory and utilizing the speed and efficiency of technology, you can help your dealership become more profitable without alienating your most important asset -- your customer.
Gary Mitchell is the National Product Marketing Manager of DealerLink
For over 10 years, LeaseLink has been the most widely used, comprehensive provider of leasing data available. Known for personnel expertise and superior customer support, LeaseLink continues to lead the industry. The recent additions of Guest Track BDC software and Wizard Inventory & Custom Finance formed DealerLink, the first totally integrated suite of front-end products available today.