For dealerships with a large sub-prime customer base, finding the right lender can be challenging. Ideally, you want a lender who is willing to buy all turndowns and who gives the highest advances, longest terms and lowest rates with zero fees. But we all know that wish list is practically impossible to find.
So, how do you find the right lender for your dealership? Vetting potential lenders with the following questions will help to increase the likelihood that your next partnership will be a success.
1) Can they help optimize sales with back-end products like vehicle service contracts or GAP?
While dealers are currently banking high profit margins on pre-owned vehicles due to inventory shortages, this situation won’t last forever. Eventually, reality will return along with tight retail processes and margins of less than $2,000 per vehicle.
In both good times and bad, profit margins can be significantly increased with the addition of back-end products such as warranty, GAP and insurance. Some lenders even offer guaranteed back-end profits on every deal; for example, 20 percent of invoice or a minimum threshold of $2,000. Guarantees provide dealers with the confidence they can sell more product to generate higher profitability on every deal, even on those $13,000 deals with $300 in front-end profit!
Another reason to embrace back-end products is because these deals tend to perform better over time, which lenders like. When the customer is protected they’re far more likely to continue making payments on a vehicle, versus walking away from a totaled $8,000 vehicle with no GAP overage. When customers abandon vehicles, it hurts a dealership’s portfolio. So, not only can you make money with back-end products, but they can help to protect your portfolio with that credit lender.
2) How fast are deals funded?
Once a contract reaches the lender, the average speed for funding deals varies based on a variety of factors. Deals can be funded as quickly as just a few minutes, or it could take up to 48 hours.
Today’s reality is that contracts in transit can kill a business, so your ability to trust the lender’s funding process is critical. Dealers need to understand that if they roll a unit they’re going to get paid for it, without a lot of approval changes happening after the fact. When your money gets stuck it can have a terrible impact in terms of both reputation and finance, so it’s critical to know if your lender will come through in the way you agreed upon.
3) Do they offer flexible options that fit the needs of your customers?
Flexible financing options are a must for independent dealers. For non-traditional deals, does your potential lender have the ability and bandwidth to talk through a deal beyond what’s on the application? The last thing you want is last minute approval changes.
This also means that you, the dealer, must be willing and available to talk to the lender on short notice. A good lender will give a client several options in terms of what the lender can do and how the deal can be made better, but it might require the dealership to quickly re-prioritize tasks or re-do paperwork on their end.
4) Does lender provide consistent and reliable decisions?
Let’s say you submit a deal on the first Tuesday of the month for a customer with a certain credit profile or income. When you submit another deal with the same customer profile on the last Tuesday of the month, will those deals be decisioned in the same way? Professional lenders won’t alter criteria based on quotas.
Another important question to ask is the average length of time for callbacks. In good times and bad, you rely on your lender for consistent callbacks. Also, understand your potential lender’s value proposition and the niche they serve, and make sure these align with your own.
Consistent profitability results from the ability to make the most from every deal, from multiple transactions over the long term. This requires a consistent and reliable lender who has a reputation for treating their clients well.
5) Will they take care of your customers?
Last but not least, will the lender take care of your customers the way you would? This doesn’t apply to just the way a lender treats your customers, but in their ability to structure a deal that is best for the customer.
For example, a lender might not provide the largest advances, longest terms or lowest rates, but they might be adept at matching pricing to a customer’s risk profile. This ensures that the customer is put into a structure that is best for them and offsets their risk profile.
Don’t forget that after you sell a vehicle to a customer, the lender has a long-term relationship with that customer. If a customer has a positive experience with their vehicle and their lender over the long term, that customer is more likely to return to your dealership for their next vehicle.
Remember that in order to have a successful lender relationship, transparency is required. Sometimes that requires hard conversations. Although this may result in moments of unpleasantness, these often end up being the best relationships; the type where you can call a partner out for not doing what they promised to do, and then together focus on fixing the problem.