The secret to maximizing gross profit in special finance is to minimize the risk of the loans for the banks. You do so by effectively structuring the deal for both profit and performance. The number of approvals the banks gives, the ability to collect on each loan, and your profits will all increase dramatically if you focus on deal structure before ever presenting the deal to the bank or the customer. The top dealerships across the country are experts at deal structure and still yet work every deal feverishly for cash down because every dollar down reflects more equity for the buyer, less risk for the bank and more profit for the dealership.
Everything about the deal depends on sound structure. Typically when a deal is submitted to the bank for approval, most finance managers can’t resist the urge to maximize the amount financed and ask the bank for as much money as possible, expecting to negotiate downward. By doing so, they are making one of the most common and costly mistakes in finance. Most lenders screen deals for approvals using an automated system and an internal scoring model to save both time and money. These automated systems will quickly decline any deal that is structured incorrectly. Thus limiting the options available to the credit manager and preventing a dialogue between the bank’s buyer and the finance manager at the dealership. Instead, get the approval first; negotiate (re-hash) with the bank afterwards.
The days of asking for the moon, shot-gunning deals everywhere just trying to see what sticks are over. To be effective, today’s finance managers have to be crafty, persistent, and in-tune with their profession. They must thoroughly understand the programs and underwriting guidelines for each lender with whom they do business and they must structure and submit deals accordingly and with consistency.
Lenders are your business partners, and the first goal for any finance manager should be to discuss each and every deal with the credit manager at the bank. Business is done by people and through relationships. So, treat the relationships with your lenders as partnerships in profitability and spend some extra time structuring the deal before hitting the submit button on the computer.
Deal structure determines profit. Deal structure dictates loan risk and can make or break the deal. The Cardinal Law of deal structure is affordability. Can the customer afford the payment? Can the bank afford the risk? Can the dealer afford the profit margin?
The risk meter for the bank is LTV (Loan to Value), how much money the bank is lending in relationship to the book value of the vehicle. A high LTV is a high risk for the bank; loan approvals are inversely proportional to LTV. As you lower the LTV, you are actually increasing the likelihood of an approval by decreasing the risk of the loan. Debt to Income (DTI) and Payment to Income (PTI) are also ratios that the bank uses. DTI and PTI determine if the customer can actually afford the vehicle. This is why proof of income is so important for special finance deals. Together these three ratios determine the amount of risk for the bank and whether or not your customer gets an approval. Every lender will differ on the thresholds for each ratio and adjust interest rates and fees accordingly for the loans they approve. It is how banks compete.
You will be amazed how competitive banking is today in special finance. Just slow down the process and structure every deal in steps keeping profitability and the ability to collect in mind. If you do this, your approval rate will increase, your relationships with lenders will improve and your gross profits will grow. If you want to build a strong and healthy relationship with a lender, communicate with them regularly and consistently put good deals into their portfolio. As your book of business with a bank grows and begins to outperform the loans other dealers in your market submit, over time your value as a partner will increase and you will be able to put together deals you once considered impossible.
If you think about improving your business one deal at a time instead of focusing on the end-of-month numbers, success will appear. Every deal has to be a “good” deal – good for the dealership, good for the customer, and good for the bank. Good deals mean good business.
Vol 5, Issue 9