At a recent industry conference, I was surprised to see dealership managers were not familiar with setting up financing first, rather than last — a key strategy for successful sub prime deals.
Working a deal backwards can maximize the gross on the vehicle, the delivery options and customer satisfaction.
Nothing is more frustrating for the customer and the dealership staff than going through the entire sales process of selecting a vehicle, negotiating a purchase price, sitting through a finance and after-sale presentation only to have the deal die when the customer's credit disqualifies them.
Usually, the customer is embarrassed and chooses not to pursue alternative vehicles at the same dealership, and the dealership loses the opportunity. It's a shame considering how often it happens and what the dealership has already paid to get the prospect through the door.
You can only hope for a reduced gross on the vehicle if the customer is approved through a non-prime lender, after a discount is applied.
The better option is to determine early the credit worthiness of the individual. With 50% or more of vehicle shoppers being credit-impaired, it allows both the sales desk and the finance office the most favorable opportunity to select the lender that will most likely approve the customer, and structure a deal that will fit their criteria.
After reviewing the credit statement and credit information, you may feel certain that the customer will only qualify through a lender that will advance 110% of invoice or NADA trade value for the vehicle, and 135% of the NADA trade including tax, tags and after-sale products.
This isn't a problem if you are aware of it in advance. But if you have a customer sold on a vehicle and are needing to finance MSRP or more, you are obviously in trouble.
To continue this example, you would calculate what 110% of NADA trade is on the vehicle you are considering negotiating on. If that product, less the lender's discount, combined with the available money the customer has to use as a down payment (or trade equity) isn't sufficient to sell the vehicle at a normal gross profit, it is time to suggest to switch vehicles, or look for additional money to use as a down payment.
Once you have selected a vehicle that is below invoice or NADA trade, multiply the value by 110%. This amount, plus the available down payment, will be the maximum sale price that the lender will finance (also providing the maximum gross profit on the deal without getting any additional down payment from the customer).
Considering this is the maximum, you wouldn't negotiate a deal resulting in a higher sale price, as you know in advance the lender won't fund it.
Next check the lender's payment-to-income ratio requirements. Calculate what the payment will be, based on the maximum term permitted by the lender on the vehicle selected (at the maximum price determined above). Does it fit the guidelines? If so, then calculate the maximum allowable payment to determine the available room for after-sale products. Ultimately, you must keep both this and the maximum 135% advance in mind when the finance manager presents after-sale finance & insurance products.
Using this process, you now have a deal that will fall within the lender's guidelines, and provide the maximum gross profit available on the deal.
Greg Goebel ([email protected]) is a partner and moderator of the Twenty Group firm Leedom and Associates. He has over 16 years experience as a dealer and is also the creator and administrator of AutoDealerDaily.com.