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Choosing the Right Special Finance Company

October 2006, F&I and Showroom - Feature

by Jim Bass - Also by this author

Questions that come to me quite often are, “How do I choose lenders, and how do I get them to sign up my dealership?” Some readers will see these questions and wonder what the problem is. Those readers probably will be running the special finance department of a relatively large, city-based franchise dealership with, quite possibly, more than one auto brand that the department is responsible for. And, the banks and finance companies usually do seek out dealerships such as these because of the perception that there will be plenty of business and the finance company will get its fair share. However, not all dealerships fit that description and may have to seek out finance sources for their special finance business.

Most banks and finance companies have a preferred borrower profile that they’re more likely to purchase. So, if your dealership is seeing, or wishes to see, primarily nonprime borrowers, that is, customers with credit bureau scores of around 620 and up, that will mean your finance resources would not be the same as if your dealership were seeing scores of 520 and below. The underwriting is different, the documentation requirements are different and you need to be aware of what will serve you best. There are finance companies available for the full spectrum of credit, but some matching is required to ensure that your customer base and inventory will fit the finance company’s requirements.

Some finance sources are almost more focused on “efficiency” than they are on volume. That is, they are very interested in the look-to-book ratio for your dealership — the ratio of contracts purchased divided by applications received. Typically, if the look-to-book is less than 10 percent, the finance source will be speaking with you about improving that ratio and screening applications more carefully prior to sending them to the bank/finance company for credit decisioning. Failure to meet the bank/finance company’s efficiency expectations usually results in the dealership getting cut off. For example, if a finance source states in its guidelines that it will not approve applicants with credit scores below 550, then you should plan accordingly and not send them an applicant with a 480 score. While that seems like common sense, you might be surprised at how often purchasing guidelines are ignored, either through ignorance or boundless optimism on the part of the special finance manager.

However, there are other lenders who are not concerned about efficiency measures and want to see all your applications. Others wish to see all applications except those that have “deal killers” under their guidelines. A common example of a deal killer is an applicant who has had multiple repossessions.

Mainstream Lenders and

Independent Dealers

What if you are an independent dealer? What are your chances of getting mainstream lenders? At present, most of the finance sources are trying to develop an underwriting scheme for independent dealers. Unfortunately, there have been a few bad apples in the past that have made many of the lenders skittish about taking on more independents. However, if your dealership has sufficient net worth, stocks the inventory that a lender is willing to finance (many will not finance a vehicle older than five model years or with mileage in excess of 80,000 miles), a customer base that has a fair amount of applicants within the credit score range in the lender’s guidelines, and the appearance of your dealership is professional, then you have a better chance than you might have had a couple of years ago of getting mainstream lenders to sign you up. But, there are still banks and finance companies that will require five years in business as the first criterion.

Most franchise dealers have the advantage of the factory’s approval, which many lenders will rely upon for questions of financial stability, integrity, etc. I didn’t say it was fair, but that’s the way it is.

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