By many accounts, the current credit crisis is the result of too much money being loaned to the wrong people with the wrong repayment terms. Despite the government’s best efforts, money at financial institutions ranging from the largest national banks to the local credit unions is not being put to work to improve the market. The banks that we know and trust are experiencing huge challenges themselves, so much so that even existing clients’ accounts not in any form of default are being closed, and new clients with near-perfect credit and collateral are being denied financing as well.
Banks are using government bailout money to fund mergers and acquisitions, not to offer new loans to the people who need it most. The national banks and finance companies that depended on Wall Street for capital will probably not be in a position to loan any new money to clients and dealerships for the foreseeable future. They are understandably focused just on survival at the moment after losing their funding sources. Banks buying banks will not thaw the economy.
Many of the biggest names in subprime finance have effectively halted origination operations altogether. While the subprime finance companies understand the client, know how to collect and have many years of experience, their sources of funding have been completely shut down by the current conditions. They are unable to offer securitizations or other forms of “instruments” that historically have provided them money to use for new originations.
With this in mind, the buy here pay here (BHPH) dealer has a strong opportunity with their typical patrons, once customers wake up from the haze of the financial crisis and make their way out of despair. Late model cars at prime rates for subprime clients are an oddity of the past. It shouldn't have happened then, and it probably won't happen in the future. The BHPH dealer will have to counsel that customer: the credit party is over and it is time to deal with the hangover.
The dealer who can offer independent financing has the power to give this customer a credit opportunity more aligned with their budget. Those dealers also have the ability to finance their operations with privately funded financing companies that have largely been unaffected by the financial crisis. Vehicle Acceptance Corporation (VAC) will work with any dealer and will fund any deal that a dealer offering in-house financing is willing to originate. VAC is ready to lend.
Companies like Vehicle Acceptance allow a dealer to offer financing to customers without much cash on the street. With a cash advance and the customer’s down payment, the dealer is able to cover the cash in the deal and is able to retain ownership of the balance of the note. This is the solution when a customer cannot get financing at the bank, other subprime finance companies decline the customer, and the dealer does not want to have a lot of his own money at risk.
The final issue is demand—getting people onto the car lot. Based upon Vehicle Acceptance production levels, the uncertainty associated with the presidential election and economy made people less likely to make big-ticket purchases. Now that the election is over, there is a good chance that things will start to turn around, even as the stock market continues to crumble. We are already seeing signs that people are starting to act on transactions that might have been put off for the past several months due to political uncertainty.
The negative focus of the times is Wall Street and big banks; the hope is that small businesses and Main Street America will jumpstart the economy. With the right relationships and business strategies, the independent auto dealer has the opportunity right now to be a part of the potentially biggest growth period for independent finance in the history of the business. You can structure the right deals with your subprime customers. You can become part of the solution to the economy.
While we all hope the results of the presidential election will improve conditions, what really matters are the tens of thousands of independent dealers who can finance without Wall Street approval. The independent dealer can help the customer make the right choices for their future.
Vol. 2, Issue 6