Monday, December 10, 2012

Welfare Queen Car Financing

Lots of chatter on blogs recently about welfare queens getting financed for a car. More news stories and blogs about sub prime car loans.

Much misinformation is being spread. My credentials?  Spent close to three decades in retail auto sales, and involved in thousands of car deals. Have been out now for five years. Things may have changed, but I doubt it. Very little fundamental change occurred in the time I worked in the business.

Excluding cash deals, a car dealer has one, and only one, customer. That is the lender. Loan structure is everything. The back and forth most car buyers hate is a process to get an agreement on a structure the lender will accept.  Leasing is just another way to finance  a purchase. As a sales manager, I wasn’t much interested in what you wanted. I was very interested in what you would do. Most vehicles are sold on one question, “If I could, would you”?
Car dealers make money on the front end of the deal, and on the back end of the deal.  All deals start with the invoice (new) or “book” on used. The front end is what percentage  the lender will finance of the invoice (dealers cost, not MSRP) or “book” (price guide lines, i.e., NADA, Kelley). This is the price the lender “owns” the vehicle and will pay the dealer without recourse. Once the consumer makes one to three payments, the dealer escapes any penalty if the consumer defaults. Back end is finance profit, insurance, warranties, etc. If the consumer defaults, a percentage of this is charged back to the dealer.
The lender looks at  the consumer using the four “C’s”, credit history, capacity, character and cash down payment.  Character can be, how long on the job, how long in the area, how many valid personal references, and the like. Capacity is how much the creditor makes,  less current obligations. Sometimes alimony and child  support  is considered. The lender wants to be able to attach wages in case of a default. Social security, military pensions, and public assistance cannot be attached.  Cash down, or trade equity, make structuring the deal much easier.
I have seen pensioners with stellar credit approved for loans. I’ve never seen someone on welfare get approved. Not saving it doesn’t happen; just, I’ve never seen it. Most likely,  a straw purchase of some kind.
Subprime is a world all alone. My personal view is those getting subprime loans have earned the right to pay high interest. A few have been caught up in things like major medical problems. Most have been making bad financial decisions their whole lives. For the lender, it is a high risk business with fairly low return (real, not on paper or “projected”).
The most difficult part of being a car dealer is buying inventory, not selling. The public really has only two questions;  how much down, and how much a month. If I could make those numbers work, they would buy a three wheeled go cart with a lawnmower engine. Acquiring inventory that allows structuring profitable deals is real work.
If readers believe they personally have “beaten the dealer”, well, more power to you. Kind of like beating a casino; the odds are on the house side.
One last word. To get the best deal, join a credit union. Get preapproved. Do some research. Then go shopping.


Old NFO said...

I do all of the above... Looks like I FINALLY did something right... :-)

Well Seasoned Fool said...

@NFO. 5 P's :)