The wait for a car loan decision will be shortened dramatically when the Internet replaces the fax machine as the main mode of communication between dealerships and lending institutions.

Next to the customer's dithering over which car to buy, the second most time-consuming phase of the transaction for customers and dealership staff alike is getting the loan approved at terms acceptable to the customer.

But the very methods by which F&I managers communicate with lenders are already undergoing fundamental changes. The good news is that loan applications can be approved or declined within a minute or two when they are submitted over the Internet.

According to research by Killen and Associates, up to 40% of all new auto loan originations will be conducted online by 2005.

The bad news is that customers, before they even visit the dealership, can now arrange their own financing over the Internet, thus taking a potentially huge bite out of dealers' F&I revenues.

"About 5% of our customers arrange their own financing," says Danny Elliott, business manager at Greg James Country Motors, a Rusk, TX, dealership that sells all GM makes except Cadillac. "So we try to sell them extended warranties or whatever else we can. But they're a tough sell because once they've arranged a monthly payment, they generally don't want to increase that payment."

For the other 95% of the dealership's customers, Mr. Elliott is able to obtain loan application decisions in a minute (sometimes less) by using an Internet-based loan application product called CreditConnection.

Developed by Annapolis Junction, MD-based CMSI (Credit Management Solutions, Inc.), CreditConnection completely automates the credit check, credit scoring, and loan application submission processes by linking subscribing dealerships and lending institutions through the Internet.

Says Mr. Elliott, "We can contract the customer while they're still in the showroom rather than have to send them away for a couple of days and maybe have them start shopping other dealerships while we're all waiting for a loan decision."

Says Greg Stewart, finance director at Koons Buick, Pontiac, GMC, VW and Mazda in Marlow Heights, MD. "I gave it a try when a supervisor at a bank we do business with mentioned that if you're on CreditConnection, your loan application goes to the top of the list, as opposed to faxing an application, which then gets queued into line behind all the others the lender has on his desk right then.

"We do about 600 cars a month. I hardly have time to see my wife and kids, let alone wait in line for loan approvals."

The speed of electronic loan processing benefits lenders, too, since a quick turnaround from a lending institution gives F&I managers incentive to use that lender again.

"CreditConnection give me decision history reports that allow me to monitor a lender's performance," says Mr. Elliott. "I can see at a glance what decisions lenders have given me, the date of every decision, and how fast they were in accepting or declining the deal."

Another benefit appreciated by Mr. Stewart is the help CreditConnection provides him in spotting decisions.

"This system helps us make the difficult decisions, the ones that make you wonder if you shouldn't wait for lender approval before you put the customer on contract or not. We used to have to put a customer like that off for a day, but now we can get a decision in minutes.

"The system also lets us know if we need any further documentation or stipulations for the bank. When you have to wait two days for a loan approval and then inform the customer that you need more information, that can be irritating to the customer. It'll show up later in a CSI survey."

Founded in 1987 by Jim De-Francesco and Scott Freiman, the CreditConnection concept was first developed to serve the needs of Mr. DeFrancesco's own car loan financing company. Today, CreditConnection also supports the marine and RV retailing industries.

Because CMSI has patented its electronic car loan application processing system, CreditConnection is the only Internet-based product of its kind currently available.

CMSI is currently working with 22 lending institutions and more than 500 dealerships in the U.S. and Canada, including a number of Driver's Mart stores and all CarMax stores. Some of the nation's largest lenders are CreditConnection clients, including GMAC, Wachovia, Bank of America, Regions Bank, and Wells Fargo,.

Non-prime CreditConnection lenders include AmeriCredit and TranSouth. Institutions dealing in both prime and non-prime loans include Bank One, NationsBank, Suntrust, and WFS Financial.

"As we were working to automate loan application processing for the banks," says CMSI executive VP Scott Freiman, "we thought it would be great to build an electronic connection to car dealers. The problem was coming out with a standard that both dealers and lenders would embrace, so we had to devise a very open system that would be acceptable to multiple clients."

Another key for any company hoping to provide e-business solutions for F&I managers, says Mr. Freiman, is to have established relationships with both dealers and lenders.

"It's getting the relationships with lenders that's the hardest part," he says. "Anyone can drop a credit application to a lender by e-mail, but the systems the lender have that automate the credit scoring process are very sophisticated. It can take six months to two years to design and install such a system."

CreditConnection is priced according to the volume of applications submitted by a dealership, according to Mr. Freiman. "A dealership that sells 50 cars a month will pay about $475 per month for CreditConnection," he reports, "whereas some of the larger megadealer companies may pay several thousand dollars monthly. Lenders also pay on a per/inquiry-received basis."