As new-vehicle sales level off and dealer profits face even tighter limits on showroom volume, the importance of subprime financing is becoming increasingly essential for dealers of all sizes and brands.
Special financing is no longer an F&I sideline. It's key for dealers seeking to maintain overall profits.
Says finance and sales manager Bruce Werner of Ernie Haire Ford, Tampa, FL, "Dealers without a subprime department could be missing out. Credit continues to get worse for a lot more prospects, and it's essential that every dealer handle them properly."
From large megagroups to "country" dealers in towns like Woodbridge, VA, and Eagle Lake, TX, subprime has been moved from its cranny in the used-car shed to its own department. If executed properly and responsibly, it's a generator of substantial profits.
Nearly 25% of gross profits reported last year by the Earnhardt's Dodge and Ford dealerships in the Phoenix suburbs originated in a 12-person special finance department totally independent of the new-vehicle F&I staff, says Earnhardt corporate general manager Arthur S. Schaier.
He explains, "Folks are turning to subprime for a lot of reasons, and we need to keep them on wheels from Earnhardt stores.
"Besides, with higher interest rates and the desire by customers to protect the used vehicles, things like extended service contracts and maintenance agreements are an easier sell."
Another western group with a strong focus on subprime is the Larry H. Miller network of 34 stores, based in Murray, UT.
All Miller stores have subprime departments, according to the group's special financing vice president, Robert Avery. Profits there average $1,800 in the front and $600 in the back end.
But Mr. Avery cautions that to produce comparable results, subprime managers "absolutely have to be great with people, very conscientious with the paperwork and well-organized."
F&I nonprime specialists agree that customers are sensitive to their qualification difficulties, and Mr. Avery warns that "you thoroughly must understand lender programs" and "be prepared to take care of customers immediately when they are turned over by salespersons."
But the Miller Group expects any downturn in the economy to spawn more bankruptcies and "leave more paper for subprime companies."
The shakeout in subprime lenders that hurt the industry in 1997-98 eased in 1999 but resurfaced somewhat in the first half of 2000 with withdrawal of the Money Store from the special financing market and shutdown of National Acceptance Corp., of Solon, OH.
But increased sales and profits were reported in the first half of 2000 by Fort Worth, TX's AmeriCredit Corp., and Irvine, CA's WFS Financial Services.
Credit Acceptance Corp. of Southfield, MI, has expanded a subprime leasing operation it began at 35 DaimlerChrysler dealerships with DaimlerChrysler Financial services.
AmeriCredit has become the preferred subprime provider for Chase Auto Finance, with WFS President Tom Wolfe citing a 20% jump in serviced contracts this year alone and record first and second quarters.
Paced by Voisys Systems Corp. and 1-800-Bar-None Inc., lead generators exclusively in the secondary finance sector have enjoyed substantial growth in the first half of 2000.
In fact, it was an affiliation with 1-800-Bar-None that turned around the ailing Chevrolet-Oldsmobile-Cadillac store owned by Tom Reed in Eagle Lake, TX, halfway between Houston and San Antonio.
Mr. Reed's Lake Motors organized its own subprime company, J and S Financial, a buy-here/pay-here setup of the type which spawned Credit Acceptance Corp., and worked its way out of a $500,000 debt caused by the 1998 GM strike and severe flood in the Eagle Lake area.
Mr. Reed is highly selective in pursuing the J and S agenda. Only 24-month leases are offered, mostly on under $4,000 cars; buyers must be employed; a downpayment is required of between $1,500 and $2,000, and interest rates range between 18% and 25% depending on the downstroke.
"If they're employed and look like they'll stay employed, I'll finance them," says Mr. Reed. "But I need a lease deposit first and foremost, and we're building our lease total now to a monthly cash stream of $30,000 or more."
Lead finder Voisys keeps Jeff Griggs busy as special finance manager at Lindsay Chevrolet in Woodbridge, VA.
About 30% of Voisys leads that result in showroom appointments produce actual sales at Lindsay, and subprime sales amount to about one-fifth of the dealership's average deliveries of approximately 200 new and used units a month.
Primary lenders for Lindsay include Auto One Acceptance, Ford's Triad, Household Finance and local banks. Mr. Griggs says his inventory is kept in line with a payment cap range of $350-$400 a month, which often necessitates selling a subprime customer a vehicle smaller than the one he would like.
Says Mr. Griggs, "A smaller car will get them reestablished in 12 to 18 months and then perhaps we can move them into something larger. It's a great long-time customer builder and they become very grateful to us."
Ford Credit's subprime subsidiaries, Fairlane Credit and Triad, pioneered a policy of rewarding customers who paid steadily for 24 months with restoration of their tier-one status and its attendant lower interest rates.
That concept, combined with the "lifetime customer" value of subprime financing for customers in dire straits, has enhanced the attraction of subprime for dealers across the board.
To spread the word about subprime, successful F&I managers suggest that dealer ads carry an inset urging that shoppers get financing pre-approvals. They can do it either on the Internet or from their banks or credit unions. A good number of lenders must be in the F&I department's portfolio, not just one or two.
Passport Nissan, Marlow Heights, MD, refers to about 20 lenders all told, with primary ones being Household, Triad, AmeriCredit and CPS.
"This is a business in which you have to build relationships with lenders," says Shawn Jones, Passport's special finance manager. "We're averaging 70 units a month subprime out of 275 new and used overall, which wouldn't be possible unless I had a partner, James Adler. A dealer needs at least two persons in special finance to cover all the bases.
"Subprime is the way the market is going. Helping people out, they appreciate it and it's profitable for them and us."