Special Finance in the Mainstream

Special Finance in the Mainstream

Where have all the middle-of-the-road credit applicants gone? Once upon a time, the vast majority of dealers saw customers with average credit scores above 700. The original idea of a special finance office was to dedicate one person’s time to work on the difficult deals with credit scores of 575 or below, thus yielding the store another 30-40 sales.

The New Mainstream Customer ProfileI have just spent three days in a dealership where the average credit was in the high 400s — that is, if we found any credit at all. Most of the deals we worked involved divorce, bankruptcy, and/or a monthly income of less than $2,000. Some of these customers were living with relatives. What was once “special” has now become mainstreamed, forcing progressive dealerships to assign experienced managers to work the deals and build strong lender relationships.

As we all know, the key to selling more units is the ability to secure financing. Our customers have the desire and need to buy. What many of them lack is a 700+ beacon score. Those of us who have experienced several business cycles understand that the decline in credit scores is a result of revolving credit, loss of jobs, and a decline in personal savings. A majority of our customers are quite simply living through some tough times.

Dealerships who sell less than 200 units per month now opt to have the old special finance deals handled by the sales managers and mainstream finance department. The quality of credit in many areas has declined to a point where 500 beacon scores are the average. Collections, bankruptcies, and repossessions are on the majority of the credit reports. Proof of income, proof of residency, and high interest rates make up every day deals.

The majority of a mainstream finance manager’s day is spent on securing credit approvals for todays average buyer. With the development of credit tiers and automatic approvals prime lenders are buying deeper, and many have either created or purchased sub-prime resources. The 700-and-Above Club customers are now routinely funded without the lender officially rendering an approval. This saves both the lender and the store an immense amount of time, freeing up personnel to work on the credit-challenged deals.

In many of the larger stores, sales managers run the credit bureaus and can see a credit history before the deal is made. When sales managers are the first to see red flags, they can either switch units to meet lender guidelines, or alert the salesperson to prepare the customer for the list of items the F&I manager will need from them to complete the deal.

The New Mainstream Lender ProfileThe largest part of any lending book in any F&I office is the section dedicated to sub-prime lenders and guidelines. And the pages change daily in some cases. Sub-prime lenders are consolidating, and their representatives often jump ship to another sub-prime lender, taking the lending relationships with them.

Some lenders want service agreements on high-credit-risk deals, and will often cap the policy price at $1,500, effectively preventing the funding of typical F&I products. Lenders want to put customers into newer vehicles; they want to finance book plus a service agreement. This preference almost brings the deals back to where we all were in the 70s when the down payment had to cover the sales department’s gross profit. The poorer the credit history, the more discount fees you will probably have to deal with, a common practice with many high-risk lenders. These discounts can range from 5% to 15% of the amount financed.

Many loan approval sheets now carry the phrase “funding pending customer interview.” Lenders want to verify credit application information, and in fact, will inquire about the vehicle equipment. When added to the stipulations lenders already require, the best practice is to obtain credit application information at the outset. Dealership personnel should routinely ask customers for proof of residency, proof of income, ten references, and ten years of work and residence history. Some lenders will also want a customer’s telephone bills and landlord’s name and phone number.

The Complete Mainstream PictureThe F&I manager should know the standard criteria for special finance deals and be proactive in getting it before the deal is closed. When the unit leaves the lot, so does the customer’s sense of urgency about paperwork. F&I managers should also know which lenders use on-line credit applications and obtain a direct fax number for each loan officer they work with. A lender’s processing center is often located in a different state, or sometimes even a country other than the USA. When additional support items are faxed to a general number, the loan officer may never see them.

The key to getting a loan approved is to know the lender’s guidelines and structure the deal to meet the profile. Before you choose a lender, prepare your case ahead of time. Look at every piece of paper, evaluate the circumstances and review the deal’s structure and merits. Your level of success will be equal to your level of preparation.

Where have all the middle-of-the-road credit applicants gone? Downstream to mainstream. Do not let them be the ones that got away.

Article reprinted from World of Special Finance May 2002 issue.