Setting up Special Finance Procedures - Step Three: Inventory

The Special Finance Department has been fully staffed with qualified personnel, and the dealership has targeted non-prime customers through a well-researched marketing campaign.  Now, the dealership must be able to supply these customers with vehicles which fall within their financial criteria.  Appropriate inventory is essential to any special finance program and inventory management is critical. The dealership must keep a substantial level of specially selected vehicles to fit their customer’s needs. If non-prime customers have a paltry selection of vehicles to choose from, their enthusiasm will quickly diminish.  It all likelihood, they will walk off of the lot without purchasing anything, feeling they have been poorly treated.

Credit

Generally, the sub-prime credit customer is not in a position to be particular when it comes to selection of a vehicle. They simply want to get the best car they can afford. For these customers, vehicles with the largest margin between wholesale book and actual cash value should be considered. This is necessary not only for the profit but also to cover the discount fees associated with non-prime deals.

Income / Budget

The average income of the dealer’s non-prime customers is a critical factor when purchasing appropriate inventory. Inventory should be priced to meet the income of the average customer and deal structure of the lender. Most lenders have a payment-to-income ratio of 20%.  Using this as a guideline, a non-prime customer whose gross monthly income falls in the $1,800 to $2,000 range can have a maximum payment of $360 to $400 a month.

Lender Guidelines

Lender guidelines will restrict year, make and mileage of the inventory. Under most lender guidelines, late model vehicles with less than 50,000 miles are ideal. Once a vehicle gets above 50,000 miles, there could be deal structure problems regarding the maximum term.  Find out specific lender’s criteria for vehicles to qualify for extended terms of 72 months. Also, watch for restrictions on advance.   

Typical Special Finance Vehicles

While the guidelines vary from lender to lender, there are enough common denominators to identify the most acceptable vehicles for special finance customers.   Program vehicles, rental returns, demos and auction vehicles often meet the lenders’ criteria. Generally, used vehicles better match the payment restrictions and deal structure guidelines.  Also, domestic vehicles tend to structure better than foreign ones. 

A good target or rule of thumb is to purchase vehicles that are $1,500 to $2,000 back of book to cover the discount fees and still make a good gross profit, with a wholesale value from $8,000 to $14,000 to meet lender’s typical payment requirements.

Keeping these general rules in mind when purchasing inventory can help avoid many potential structure problems.  This means more than convenience for the lender or special finance personnel: it can be the difference between a successful deal and a lost sale.  Customers who go through the entire sales process only to be told that their chosen vehicle is out of their financial grasp are likely to walk away from the dealership entirely.  The same is true of customers who are only presented with a selection of undesirable vehicles.  In both cases, the customer’s disappointment is enough to sabotage the deal.