To the young: Welcome to a new world of auto financing. To those old enough to remember: Welcome back to the old way of financing a car deal.
“We’re back to traditional lending, the kind we had 15 years ago,” says Glenn Roberts, national training and business-development manager for Zurich Insurance.
Credit has thawed somewhat since the freeze of late 2008, but many consumers, particularly ones with subprime credit ratings, still face lending obstacles that hinder their car-buying plans.
And even people with relatively good credit are encountering stricter auto-loan standards.
Lending policies were generous during much of the past decade, before credit went Arctic. Loose practices of yesteryear included rolling trade-in negative equity into new deals, prolonging payback terms and granting loan advances for the full purchase price of a vehicle.
“A lot of loans were made that probably shouldn’t have happened,” Roberts says.
Now, lenders insist customers pony up substantial down payments, bridle at negativity-equity rollovers and issue advances more tightfistedly.
Moreover, “debt-to-loan ratio – which didn’t seem to matter before – matters now,” says Roberts, a former dealership finance and insurance manager.
“And, I know it will crack some people up, but lenders are expecting information on credit applications to be true. The days of jamming the lender are over.”
He also notes that financial institutions, in tracking loan performances, are paying particular attention to delinquency and repossession rates. Relations may chill between lenders and dealers with a lot of customers who become deadbeats.
In the past, the dealership sales and financing process went like this: Customers picked out a car, the staff worked at getting the bank to approve financing the selections and the loan-payment terms were stretched out as long as it took to get monthly payments low enough to close deals.
Whether the customer could actually afford it was an afterthought.
“Now, you need to manage the customer,” Roberts says at an F&I Management and Technology conference. To auto dealers trying to get their customers financed, he offers “Six Principles for Success in the New Economy.” They are:
- Sales people need to qualify customers better. “They need to be trained or retrained on qualifying techniques to find out what the vehicle will be used for, who will be driving it and for how many miles a year – all so you can land them on the right car.”
- Customers without cash or equity won’t get financed. “Cash is king, queen, prince and princess. The sales department needs to extract cash from customers. There should be a spiff for getting a down payment, but cap the spiff.”
- Know the customer’s ability to buy before turning them over to the finance manager. “It’s bad if a deal gets to the F&I office and doesn’t belong there. Be proactive in directing a customer to a car for which the bank is likely to approve a loan.”
- Sales managers must know the science of the deal structure so they hand the F&I office a viable deal. That means not trying to put a typical 20-year-old in a $40,000 car. “Sales managers should have hands-on F&I experience.”
- F&I can’t fix a badly built deal. Sales people should steer shoppers to cars that fit their needs and budgets, and ones that stand a chance at getting financed. “Switching cars is a lot easier to do on the showroom floor than in the F&I office.”
- As with step-selling on the showroom floor, the F&I office needs a process to enhance sales and maximize profits. “A selling system in F&I ensures that every customer is qualified properly and shown every product for which they are eligible.”