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Bridging the Finance Gap

July 2009, F&I and Showroom - Feature

by Gregory Arroyo - Also by this author

The last time F&I magazine spoke with Bob Hymen, the president of Service Payment Plan Inc. (SPP) was gearing up for what he expected to be a busy time for his almost three-decade-old company. That was in October, one of the most challenging months for auto finance. This month Hymen updates the magazine on SPP’s progress.

F&I: The last time we spoke, we talked about how the economic downturn mirrored what happened in 1983, the year you started the company? Are you seeing similarities?

BH: There are many similarities to what’s happening today. As you said, SPP started at a time when dealers were having difficulties adding a service contract to a vehicle’s financing, which is what’s happening today. It’s also one of the reasons why we’re experiencing growth in excess of 20 percent from last year. This is happening at a time when service-contract sales are down 40 to 50 percent.

The problem is lenders are simply not looking to make loans. Their focus is on collections. If they do make a loan, they’re focused on loan-to-value and they’re expecting a much higher return than in the past.

F&I: Do you plan to extend your program beyond service contracts?

BH: We’re getting plenty of inquiries on other products, such as alarm systems and GPS-type vehicle-recovery systems. Unfortunately, there are a couple of reasons why we can’t. First, our collateral is not as strong as it is with service contracts. If the customer has the product on his or her vehicle and can’t pay us, how do we cancel it and get our money back? An even bigger problem is getting the lending market to accept financing on a product that has not been financed separately before. And it’s almost impossible to do that in today’s world.

F&I: Has this new world made it difficult for you to attain funding for your program?

BH: We have current lines of credit that extend into next year, and we expect our loans will be renewed when the time comes. That’s because we have a 26-year history of being profitable, so we have credibility with our lenders. We’ve always been well funded and expect that to be the case going forward.

F&I: Are you also conservative with the consumers you approve for financing?

BH: Remember, we don’t look at the customer’s credit history. We only look at who the underwriter of the service contract is, and how it is structured. If it meets our criteria, all consumers qualify. However, we do not encourage dealers to use SPP on subprime customers. If the customer can’t afford the vehicle he or she purchased, then he or she won’t be able to afford an additional $100 per month for a service contract.

F&I: So how are the pay plans you’ve originated performing?

BH: Despite consumer credit being in such terrible shape, our cancellation rates have not materially increased this year versus the past. I’d attribute that to three things. First, we’re spending a lot more time working with customers on their payment dates, and doing whatever it takes to keep that service contract in place. Secondly, we’re signing up some very good customers to our program. Even customers with good credit aren’t able to include the service contract in their car payment. That’s because of the reduction in the advance rate by vehicle lenders.

Lastly, customers realize they’re going to have to keep their vehicles a lot longer, so they want to make sure they keep the service contract on their current vehicle.

F&I: What about used vehicles?

BH: It’s based on whether the administrators we do business with offer a used-vehicle program. Our guidelines are also based on the term of the service contract. We do require that the term of the service contract be at least twice the number of payments, as we want to make sure customers don’t drive out of coverage before they finish making their payments.

F&I: Are dealers taking advantage of your program for service contracts sold in the service drive?

BH: We’re definitely seeing more interest, but not as much as I think there should be. For dealers that are, the key is their ability to automate the process as much as possible. We currently work with DealerTrack, MenuVantage and StoneEagle, all of which can help dealers do just that.

Our most successful dealers keep the transaction in the service department. Customers simply feel more comfortable there. Another key is proactively offering the program to customers instead of waiting for them to ask for it. Dealers that have systems in place and are proactive are selling 40 to 50 contracts a month in the service department, so we know it can be successful.

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