One of the things that befuddles me about the Consumer Financial Protection Bureau (CFPB) is the agency’s narrow focus on interest rates and finance terms. If they want to ensure the fair and equal treatment of all car buyers, they should ask themselves why the same customer can be approved for financing at one dealership and be turned down by another.
The CFPB would quickly determine that getting credit-challenged customers bought requires talent and ambition, and many special finance departments are short on both. That may be the case at your dealership, regardless of the number of subprime deals your team closes every month.
I just came back from a meeting with our Special Finance SuperGroup. It’s a select group of elite performers who generate at least 80 such deals per month. Some are franchised dealers and some are independents. The meetings are a great opportunity to compare numbers, discuss new ideas and address common maladies.
One common topic is closing percentages. I have worked with many in this group for a long time, and if I have learned anything, it’s that high volume does not require a high closing rate. The benchmark for all my dealers is 33%. We have clients big and small who regularly close more than 40% of their subprime deals. Many of our elites are closer to 15% or 20%.
The reason, I suspect, is that they enjoy such a high quantity of leads that they don’t have to work smart. Effectively, they don’t mind wasting their own time as well as that of their unsold customers. Luckily for those customers, competing dealers will make every effort to bring them into their store, work the deal correctly and get them financed. Let’s look at two changes you can make to put your special finance operation on the path to a higher closing rate.
1. Hire a Special Finance Manager
If you have succeeded in SF without ever hiring, training and properly compensating a special finance manager or director, my hat’s off to you. If you have all the business you can handle, I will let you get back to it. If not, read on.
One characteristic common to dealers who don’t employ a dedicated SF manager is a very limited spread. They may work with one or two finance companies and rely on them to approve or deny their subprime customers; the gross profit that results is largely up to the finance company. Mediocrity ensues.
Dedicated SF managers create relationships with a wide spectrum of banks and finance companies. They learn everything they can about each program and match them to their customers. They structure each deal based upon the requirements of the finance company they select, earning the affections of their buyers. When two finance companies fit the customer, they know which will offer the best gross profit opportunity.
2. Work the Deals or Let the Deals Work You
Some SF managers will look at a deal and say, “I know I can get this person bought.” Then they get the callback and learn they are a long way from home. They work and work and work in vain. They’re trying to make a deal that will never happen due to lack of equity or down payment.
You must have all the components in place to get approval, proper inventory among them. But the fastest way to increase your closing percentage is to submit the right deals to the right buyers.
You might be surprised. I have seen it happen over and over with customers in every type of situation. Each year, we process transactional data from hundreds of dealers and create a report to share at Industry Summit in September. Looking at the data as it comes in, we see a wide variance between deal characteristics and the finance companies serving each credit tier.
So let’s say an SF manager has had good luck with Tier 4 customers at Company A. This company is known for finding solutions for tough-credit customers. In fact, this company has collectively funded a significant amount of the Tier 4 deals our dealers are reporting each month. The average gross profit on these deals is $1,600 with $1,860 average cash down, meaning the dealers made less than the amount of money coming from the customer’s pocket.
Meanwhile, Company B and Company C are competing in that segment by requiring less money down. By spending an extra five minutes submitting the deal through Dealertrack or RouteOne and arriving at Company B or Company C, the SF manager will (a) get more customers qualified and (b) bring in more gross profit.
If you don’t have an SF manager and don’t know how to structure the deal, you’re going to throw it against the wall and see if it sticks. There is a wide disparity of gross profits available from finance companies. From one end of the spectrum to the other, from Tier 4 and up through subprime to prime, you just can’t afford to not avail yourself of all the opportunities that might be out there. I see dealers tripping over dollars to try to pick up pennies. Their SF managers waste so much time trying to make deals that will never be a deal unless they get a cosigner or squeeze out a higher down payment.
In some cases, it can be traced back to an SF manager who is not able to read a credit bureau. They don’t see something they would allow them to make the deal somewhere else. At the other end, you’ve got people who just don’t take the time to forge the relationships they need to truly succeed.
Start tracking. Start breaking it down. You will undoubtedly find you are missing opportunities in at least one credit tier in which a particular finance company excels. Some of the best dealers I know could make a difference of $100 or $200 additional gross profit on each vehicle. Imagine what the average special finance dealer has at their fingertips.
Special finance pros are experts at squeezing just a little more down payment to make a deal work. Unfortunately, that is a shortsighted strategy for a number of reasons.
Customers know what they can afford to put down and, for the most part, they know what kind of monthly payment they can make. They take that to the dealership, go through the process of selecting a vehicle and applying for credit, then are told that they must come up with another $500 or $1,000 to make it work. They empty their bank accounts or borrow from a friend or family member to make up the difference, then take delivery.
Before they know it, the first payment is due, then the next. If their paycheck is a bit short, or something goes wrong with the car, there’s no safety net. They’re right back where they started from.
In recent years, some finance companies have come to the realization that more down payment doesn’t necessarily mean better payment history.
Tier 2 could be described as representing the typical SF customer, and it represents the highest volume among all SF tiers for most dealers. Our dealers’ data shows the average required cash down — not including trade — is $1,012. For a handful of companies, the number was much lower, yet the dealers made more gross profit on average. For those companies, the cash down doesn’t mean a whole lot. They prefer that their customers have cash left to make the payments
Greg Goebel is the CEO of DealerStrong and the industry’s leading special finance trainer since 1989. He is an 18-year former dealer principal and a highly sought-after speaker, author and consultant.