BLOG FOR SPECIAL FINANCE CAR DEALERS
Special Finance Lender Mix
Having the right lender mix is a critical factor to your car dealership’s long term success in sub prime. Your lender mix is not a static entity. You should always be on the lookout for new funding sources. When a suprime auto lender rep stops by or calls, listen to what they have to say.
Not only does the right special finance lender mix help you get more deals approved, it will help you close more deals. Having the right suprime lender mix assures that you have the highest possible advance and lowest fee on every deal. It also plays a major role in customer satisfaction; the right lender mix also assures that the customer is getting the best rates and terms based on their credit profile.
Your car dealership should have lenders with programs that cover not only the three basic credit types, Good-Bad Credit, Bad-Bad Credit, and First Time Buyers, but also sub prime lenders that specialize in specific credit situations such as Open Bankruptcy, High Debt Ratio, Short Job Time, and Lower Income.
Most automobile lenders have an internal score card to rate consumer credit profiles. These score cards are based upon the SAW principle, a consumer’s stability, ability, and willingness to repay debt. With most lenders and auto finance companies , only after an application has qualified will the equity position of the loan be considered.
An applicant’s stability can be attributed to their time on the job, time at their residence, whether they are a home owner, renter, or live with their parents, how long they have lived in the area, and their time in the credit bureau.
Ability refers to the applicant’s gross monthly provable income, their payment to income and their debt to income ratios.
The payment to income ratio or PTI is simply the new car payment divided by the applicant’s income, displayed as a percentage, or more simply put, the percentage of their income that is used for their car payment. For example if a customer earns 3 thousand dollars a month and they have a 4 hundred and 50 dollar car payment their payment to income ratio is 15 percent.
The debt to income ratio or DTI is similar to the PTI but instead of using the car payment in the calculation, the applicant’s total debt, including the car payment is used. For example, if an applicants money debt is 9 hundred dollars plus a 4 hundred and 50 dollar car payment their debt to income ratio is 45 percent. In a later F & I module we will go into detail on to calculate DTI ratios for a variety of lenders, for now, you need only know that most lenders use DTI in their score cards.
Willingness to pay refers to their past credit history. With most sub prime lenders more weight is placed on applied for credit items such as installment loans and credit cards, and less weight is placed on non applied for items such as medical bills and small collection accounts.
Now that we’ve discussed the SAW principle, let’s get back to the lender mix. Lenders with programs that are more liberal on the stability and ability factors are Good-Bad Credit Lenders. Traditionally these lenders have tiers with higher advances, longer terms, lower rates, and less required STIPS.
Lenders with programs that are more liberal on the willingness to pay factors are Bad-Bad Credit Lenders. Traditionally these lenders have tiers with lower advances, shorter terms, higher fees, and they also require more STIPS.
Throughout the country there are many local & regional sub prime finance companies that should be included in your lender mix. Most of these companies are Bad-Bad Credit Lenders.
In addition to sub prime lenders there also portfolio management companies. These companies are commonly referred to as Buy Here Pay Here lenders. The most popular of which is CAC, Credit Acceptance Corporation. The profit potential with these lenders may be limited on the front end but a number of sub prime power house dealers have had great success building long term back end profits with these lenders.
In addition to specific types of credit you will also need lenders that cater to specific credit situations. One of the most targeted sub prime demographic is the customer that has just filed bankruptcy. Most dealers are able to obtain financing for a consumer with a discharged bankruptcy but there are a handful of lenders that will approve your prospect prior to receiving their discharge papers.
Another common scenario is high debt ratios. Most lenders use both the Payment to Income Ratio, PTI, and the Debt to Income Ratio, DTI when determining the maximum payment their willing to approve. A hand full of lenders looks only at the PTI ratio.
There are many more specific credit situations that I can think of. For example you should have a lender that will consider people with multiple repossessions; people currently in credit counseling or a chapter 13 bankruptcy, people with unpaid student loans, tax liens, or child support, the list could goes on and on.
Don’t just go out and sign up every lender; evaluate each one and determine what their niche is, if you think they can fill a hole in your lender mix, sign them up and give them a try. If you’ve never heard of them, get a few references, and make some calls, not only will you determine how well they fund, but you have a better understanding of the value they’ll bring to your lender mix.
May 16th, 2010 at 9:04 pm
currently in credit counseling or a chapter 13 bankruptcy
May 18th, 2010 at 9:18 pm
By and large I do not comment on websites, but I would like to say that this post has forced me to do so! Thanks for your insightful article.
June 6th, 2010 at 3:39 am
I wish more people would write blogs like this that are actually fun to read. With all the fluff floating around on the net, it is rare to read a blog like yours instead.
June 6th, 2010 at 7:05 am
Great post thx a lot !