Sub-prime Made Easy
By John Butler
Conditions
Market conditions changed wildly in the last year. There are many factors beyond our control – the state of the Big Three automakers; credit markets; rising unemployment figures; energy costs; etc. These factors influence our business and we are all feeling the pinch. No one can predict the future with certainty of what next week or next quarter or next year will bring.
Let’s focus on what we do know: business is tough. But it isn’t non-existent.
Consider this basic fact; people still need cars. Consider further that more people are thinking about purchasing used vehicles rather than new cars because of their financial concerns.
“For example, recent analysis from Edmunds indicated that more than 20 percent of shoppers who researched a new model actually purchased a used unit.” (Autoremarketing.com; March 30, 2009)
Consider these 2009 reported projections from Dennis DeRosiers’ research reflecting changes in the Canadian market: 2009 new car sales are projected at 1.35 million units, which reflects a 17.5 percent decline from 2008.
“Sales of used cars will jump by up 300,000 (approximately 2.89 million) units per year as Canadians escape higher financing charges and higher vehicle prices that are coming due to tightening commercial credit,” DesRosiers said. (Reported in The Windsor Star, Chris Van Doelen, October 23, 2008.) This reflects approximately 11.4 percent increase over sales in 2008 (2.59 million).
According to these new car sales projections – this is more than a 2:1 ratio of used to new car sales. It remains unseen how new car sales will fare through the year.
Consider also the credit crisis affects the credit situation of many people, driving their credit scores down. An opportunity exists in this market if you are willing to engage or continue special finance.
Why special finance now? The better question is how can you not do special finance? Here’s the critical fact: Whether you like it or not, sub-prime is here – and the number of sub-prime customers is growing! This spells opportunity for your store. Are you prepared?
“If you’re not in special finance, you’re only half in the used-car business…” quoting an Acura dealer in Special Finance Magazine, February 2009.
What do I do now?
The most important thing you can do right now, if you haven’t already, is change your attitude toward sub-prime sales. Some people stay out because they think it is too complicated. “Too much brain damage,” they say. Not if you apply some simple fundamentals. Some people say, “We want to protect our reputation.” First, you can do sub-prime in such a way that your reputation is not in jeopardy. Second, frankly, do you want to keep your business going or keep your reputation as business dries up? You can have both a good reputation and a sub-prime department. Some people say, “I don’t have a sub-prime expert.” We’ll look at how technology can help.
Fundamentals
There are four fundamental things to keep in mind for success in sub-prime. Let’s look at them briefly. I will happily forward to you a more complete description of these fundamentals. First, a sub-prime customer is not an auto customer, but a credit customer. This changes your business from the auto business to the loan origination business. Your staff has to understand this or the sales process is headed for trouble. Understand it and act accordingly and your results can really grow. Second, the sub-prime sale is completely backward from a prime sale. Your salespeople must learn to discover who the credit customers are in such a way as to not alienate the prime customer. Does the customer go to the lot to look at cars or to the credit office to discuss financing? If you get it wrong here you will end up with a frustrated customer whose expectations will not be met and will be frustrated as they learn the limitations of their credit. (Contact me for some guidelines and helpful word tracks.) Third, you have to be in control of the timing and choice of the product. Why? If your customer lands on a car that is not appropriate to their credit situation, you will have to switch them. Switching customers costs you money! The offended customer leaves and gives your competition the business. If that happens once or twice a day, you lose a lot of gross profit. It isn’t uncommon for that loss to be as much as tens of thousands of dollars a year. You can’t afford that kind of loss right now. Last, this customer should be your customer for life. Treat them like an annuity! They will tell family and friends if you treat them well. You’ll be glad you did.
Protecting your reputation
It is important to know – really know – that the sub-prime customer is coming to your store. Change your attitude if you have not wanted them in the past. If you practice the fundamentals, you can help them and get business. Prepare your staff. Another way to protect your reputation is to use blind advertising for the credit-challenged customer with toll-free numbers and a process that does not immediately identify your store. You can use mail that directs the customer to a number rather than to a store and then, with proper process, that customer can get the credit help they need from you while your store’s reputation remains intact.
Technology can help you
Everyone is reducing staff and biting the bullet. How can your managers and people continue to do it all with a much smaller staff? What if you lack the special finance expert you think you need to run this business?
The kind of tool you need is one that can function as “special finance in a box.” Technology can do the work of a seasoned special finance manager, just much faster. You need a tool that can calculate the potential profitability of your entire inventory and the LTVs on every vehicle in your inventory. Let’s face it; lenders aren’t just looking at the credit situation of the customer but at the underlying collateral as well! Knowing where you stand in every piece of inventory can help you get more deals approved. You can’t do all of that in your head.
You also need a tool that calculates accurately the front-end gross and the back-end as well so you maximize every opportunity you get.
You need a tool that can make it easy for any of your managers to handle the sub-prime deal with a simple, intuitive process so the brain damage is eliminated! Now more than ever, it is crucial to capture the opportunities your store gets. Get a tool that does multiple iterations and eliminates the hassle and imprecision of calculating deals in your head – things like roll back, payoff, down payment, variable changes, etc. This will save you time and money.
Sub-prime should be easy with solid fundamentals and technology working for you. You need every advantage you can get in this market! |
