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Subprime Used Car Inventory Mix
What is the minimum income required for a $380 dollar payment? We’ll cover these specific calculations is a later post, but based on a subprime auto lender that limits the Payment to Income ratio, PTI, to 20% the customer would have to earn at least $1,900 per month to qualify, and if the lender limits the PTI ratio to 15% the customer would have to make around $15 an hour, $2,500 a month, or $30,000 a year to qualify for a 380 dollar payment.
What is the median hourly wage for people with bad credit in your area?
Is it over $15; most than likely not?
Our data indicates that an average car loan for people with bad credit, with a payment of $380 per month, is $15,123.
Most special finance lenders have a minimum required cash down payment of $1,000, if you combine that with the amount financed, you’re at $16,123.
Subtract out the taxes, other state fees, and the lender fee; I’ll use a 6% tax rate, $150 in state fees, and a lender fee of $500. You’re left with roughly $14,500.
What’s your average gross on a used car deal? Better yet, what’s the average gross on a special finance used car deal? Depending on the area of the country it could range from just under $2,500 to just over $4,000; I’ll use $3,000.
Finally, subtract the $3,000 from the $14,500 and you’ll get $11,500, which is the average used car ACV needed to make a $3,000 gross profit on a subprime car deal in an area, where the average income for people with bad credit is less than $15 an hour. This average ACV would have to be lowered even further to include back end products. Did I explain that well enough?
To maintain at least a $3,000 gross average our data indicates the ideal used car for people with bad credit has an ACV between $7,500 and $12,500, additionally, the vehicle is up to five years old, and has less than 75,000. If you have few used cars in this range you will not be able to cater to median income sub prime buyers and maintain an average gross profit of $3,000.
It is often said that with used cars money is made when you buy the car, not when you sell it. This holds true for sub prime as well. Most sub prime lenders base their advance on the NADA, Black Book, or the Kelley Blue Book value, which book they use varies by region.
If you were to sell a used car for $15,000, the customer had $1,000 cash down, and the lender advanced 115% of the vehicles trade value, the vehicle would have to have a trade value of roughly $12,200.
In the example we just used the gross profit can be broken down into three segments, cash from the customer, advance from the lender minus their fee, and equity inherent in the vehicle.
The customer contributed $1,000 cash.
The lender contributed 15% of the $12,200 book value minus their fee, which equates to roughly $1,300.
And the store contributed $700 hundred to the deal by having a vehicle with a trade value of $12,000 lot ready, with an ACV of $11,500. In other words, you owned the vehicle $700.
Let’s put it all together one more time and look at the contributing factors to our $3,000 gross; $1,000 cash from the customer, $1,300 net from the lender, and $700 hundred from the equity in the car.
As we have shown, there is three ways to increase the gross profit on a sub prime deal, get more money down, use lenders with higher advances and lower fees, and buy cars that are back of book.
Will discuss building down payment and utilizing the right lenders in another post, for now let’s talk about buying cars back of book.
How do you acquire vehicles for sub prime that you can purchase back of book? Buy used cars that are in high supply and low demand? These vehicles may not always appeal to customers with perfect credit, but your sub prime customers will love them.