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.
