When did lenders become virtually the same? Oh, there are niches and a program twist or two, but overall the variation within each credit segment of the business are minimal.
The only real differentiator, now more than ever, is the service provided by the lender. In this lending environment it may make more sense than ever to consolidate the number of lenders used by your dealership.
There is a continual stream of new lenders vying for your business. Perhaps their rates are .25% less than your current favorite bank's, or another one approves 550 FICO scores for 84 months, and maybe this other new one gives airline mileage with a booked loan. These are all nice to have, but the real difference is the service levels that lenders provide, both from the field representative and the internal credit buying and funding teams.
The preferred treatment that any dealer would want generally equates to the volume or quality of deals that you can send a lender. If your business is spread out among dozens of lenders then you can expect to be treated as just another dealership. Rather than simply deciding internally which lenders with whom it make the most sense to do business, it may make sense to formally include your lenders in this process. By involving them, there may be a strong chance to gain upfront concessions.
I've been involved with several dealership groups establishing a preferred lender program. They formally committed to send a significant majority of their business to a select number of lenders in each credit tier. Each effort turned out well for the dealer groups. Benefits included:
- Special financial incentives or rewards for the dealer management group.
- Improved field representative service levels for the dealerships
- Priority funding for contracts sent
- Priority credit decision making
- Special rates and program features
- Enhanced credit buying
Other benefits developed, and should be considered as well. They are:
- Improved management control over finance departments. The dealer principal and management team decide where and with whom they want to place a majority of their loans. This establishes the lender relationship with the dealership opposed to an individual finance manager.
- Ability to rework the dealer agreement. There are certain modifications that can be obtained. They can make the agreement more favorable and balanced than the one sided versions that are usually in place.
- Better cash flow. With priority funding comes fewer contracts in transit. Additionally, fewer lenders generally mean fewer stipulations or different document requirements that can create funding delays.
Of course challenges arise when trying to change the current processes within a dealership.
Among the challenges:
- Resistance from the finance department. F&I staffers feel lenders are their domain and that they have unique relationships far stronger than anything the dealership can establish.
- Fear of losing a deal because a preferred lender on a short list won't buy it. Simple solution: Send it elsewhere after giving your primary lenders the first chance to review the customer. The preferred lender program is designed for 90% of your customers, not the three deals a month that require unusual terms or have Charles Mansonesque credit.
- Supporting the effort. Management oversight is needed to ensure the loan volume is not being sent elsewhere and that lender metrics such as book-to-look ratio remain favorable.
While intuitively this type of arrangement makes sense, operationally it was difficult for many dealers to formalize and launch a preferred lender program.
While this approach works for individual dealerships too, any dealer group in the top 50 or 100 in sales volume that has not looked at or tried this approach should evaluate it. The benefits, both from greater ease in doing business to potentially lucrative financial incentives, may be too great to ignore.
Bryan Dorfler is an F&I consultant. E-mail: [email protected]