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Six Tactics for Non-Prime Lending

December 2007, F&I and Showroom - Feature

by Richard Apicella and George Halloran

Nonprime auto financing sources face diverse challenges competing in the U.S. marketplace. The four keys to the game are usually the same: grow share, manage losses, streamline operations, and improve dealer and customer satisfaction. Arguably, growing share is the most important for a finance source. It is also the most difficult goal to achieve. To win, nonprime players need to take maximum advantage of their core competencies and unique market characteristics, as well as evaluate and adopt leading practices and supporting technologies consistent with their business strategy.

From BenchMark’s ongoing experience with nonprime auto financing through its 2006 Nonprime Automotive Financing Benchmark Study (NPAFBM), annual National Auto Finance (NAF) Association surveys and numerous consulting engagements, it’s clear that sales performance and capture rates remain high priorities.

The primary effectiveness measure for the dealer relations process is capture rate, which refers to the number of booked contracts as a percentage of total applications received (book-to-look). For the 2006 NPAFBM, capture rates ranged from a low of 3.3 percent to a high of 10.8 percent, with an average of 7.1 percent. This is comparable to the 9-percent average realized in the 2006 NAF Association survey, but significantly lower than the averages for prime and captive auto finance providers.

In order to maximize application volume and funded contracts, nonprime finance sources are executing against unique strategies with various tactical approaches to organizational structure, account management and performance.

Generally, nonprime financing providers want their sales force aligned with their internal credit and funding functions. Their specific strategies are a mix of market offering, branding, sourcing and pricing. Based on the approach to these factors, each provider tries to present a unique value proposition to differentiate itself in the market. Capture rate is certainly vital to success, but the ultimate goal is producing expected earnings from the business generated.

The key strategic and tactical attributes that drive capture rate are: credit quality mix, pricing/negotiation, dealer coverage and penetration, organizational alignment, sourcing channels and salesperson incentives. Let’s review each one.

1. Credit Quality Mix

The most significant strategic characteristic of credit operations is the level and depth of customer risk being targeted. Higher-risk credit applications are more complex and require more underwriting effort. Those financing sources targeting the higher-risk segments find that maximizing capture rate becomes even more challenging.

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