Looking for Lenders
The challenge is to find sub-prime lenders that we can rely on to stay in business. Too often, we see lenders buy loans at a fast and furious pace for a relatively short period of time, and then close. If we want longevity from our sub-prime lenders, we need to recognize all aspects of the quality of paper they purchase.
Most of these lenders know that 40-50% of the loans they buy will be repossessed during the loan period. They know this going in and hopefully budget for the losses. The critical factors then become the loan collateral and the lender’s cash flow. Will the collateral hold its value in the auctions after the repossession? And will the remaining 50-60% of the customers make on-time payments?
Credit card debt is high nation wide. A finance manager recently told me that many Americans spend money they do not have on an item they do not need to impress people they do not like. Could this observation apply to automobiles?
Outside of credit card debt, delinquent credit is often the result of a mechanical repair that the customer could not pay for. The excuse customers use most often is that the vehicle did not work properly, so they did not make the monthly payments. The unit we sell to the client should be solid and dependable transportation. The deal should fit the customer’s budget. And the finance plan should include a service agreement to offset the cost of major repairs.
If the customer has past credit problems, we need to secure down payment money as a form of equity in the unit. Most people who have enough equity will not let the unit be repossessed. They will take another job or find other resources to make the payments.
Lenders will continue to increase their use of the Web as a medium to approve and fund loans. Technology can increase their productivity while decreasing the cost of doing business. We need to look for ways to utilize technology with lenders to become more efficient.
Online banking is an excellent example of efficient technology. We can promote ATLP (Automatic Transfer of Loan Payments) on most auto loans. Customers can use either ATLP or online bill payment to save time and money. Automatic payments from checking or savings accounts are usually made on time with reduced administration costs.
Sub-prime is not going away. It is a huge part of every dealership’s business. Dealers and lenders need to see themselves in partnership. The success of each resides in the success of the other. Working together to create sound business practices will build a strong customer base and promote future growth. Looking out for one another makes good business sense.
World of Special Finance, April 2003, pp. 20-22.