Dealers tell me pressure to remain profitable mounts. Profitability is a persistent topic today. It is impossible to ignore, especially for dealers representing brand that are under performing in the marketplace.
So where do you look for additional profits? One area gaining momentum is subprime vehicle financing.
Also known as special finance, it puts credit-challenged people in used vehicles. (There is some new-car subprime financing, but not much.)
Dealers should decide what credit challenged means in their operations. But it is essentially a customer who has difficulty obtaining credit approval or cannot get it through conventional finance lenders.
So what can you do in these cases?
Some dealers have entered the buy-here/pay-here business by floating a note to the customer and securing payment over time. The dealer acts as the lender rather than as a middleman between the borrower and third-party lender.
This can be a profitable business model if the collection process is strong and you have the cash to support the note receivable balances that will be collected over time.
The interest rate on these notes is higher than a conventional finance arrangement. You must have adequate staff to oversee collections, which can be paycheck to paycheck with some customers.
Also have a computer system that adequately tracks collections. Necessary, too, is personnel to manage repossessions, which are a part of buy here/pay here.
Because of the difficulties and risks involved, many dealers shy away from such a business model.
Another alternative is to arrange for alternative financing. Some lenders may buy the paper where a conventional lender may not. But what about that interest income we mentioned earlier?
Some lenders offer options in which you participate in a program that allows you to earn a portion of that income. Here is how the program works:
- You get paid for the contract on the sale of the vehicle so you are not out the cash while the contract earns out.
- Interest income earned on the contracts as they earn out can be accumulated in a pool of as many as 100 contracts or customers.
- Repossession losses (remainder due on the contract minus value of the vehicle at time of repossession and with recovery fees figured in) offsets the interest-income earnings accumulated.
- Net difference of the interest income earnings less the repossession differences is paid out to the dealer.
- If the repossession losses exceed interest-income earnings, you would not be responsible for the shortfall, unless you wished to start another pool of 100 contracts under the program. If you continue with the program, you cover the shortfall. Otherwise you can walk away.
- The finance lender handles collection activities.
- The finance lender handles repossessions.
For those of you who do not mind accepting some risk, this program may be of interest to you.
The key to the program rests with you and your team being able to put sincere subprime customers in a reliable vehicle they like and with payments they can afford.
A last, but important point: Unreliable vehicles that chronically break down during the term of a note can result in significant loan defaults. So, the same standards of reconditioning a vehicle and making it road worthy apply here.
Many dealers make a lot of money in the subprime market. It can be risky, but also rewarding, especially when it is properly overseen, and when vehicle loans are extended to people who show promise of paying them off, even though they might not have sterling credit.
There are vendors that offer programs like the one I described. They help you negotiate the risks. Find partners that will make your profitability their concern, too.
Certified Public Accountant Wayne Fortier is a dealership consultant with Dixon Hughes PLLC. He is at 919-876-4546.
