Sound finance portfolio management is an art and science.
Both require skills and experience, but they also require the right tools. Artists use quality brushes, woodworking tools, chisels. Scientists put their Bunsen burners, beakers, and computers to work. Finance professionals use proven policies and procedures, GPS technology, the data it gathers, and their people to positively impact auto loan risk management.
It’s always a temptation for the retailer to increase loan volume, but with increased volume comes greater risk. Of course, there’s always the limiting factor of how much capital is available, but even when staying within the confines of capital limitations, without proper risk management and mitigation, the results are the same as outspending capital — insolvency.
Buy here-pay here dealers can always increase sales. In fact, it’s easy. The sure-fire way to move inventory off the lot is to lower the down payment. It’s difficult for the credit-challenged customer with a moderate income to come up with $1,000, $1,500, or $2,000 down, so when they hear “No Money Down” or “$99 Down” they make a bee line for the store.
Whether dealers loosen or tighten their finance parameters, it’s up to them to control the three key aspects of the finance cycle:
1. Contract origination
2. Decisioning
3. Collections
Even with years of experience, stip verification, and sizeable down payments, there’s no guarantee the customer will pay. Unforeseen circumstances and out-and-out fraud are just two ways dealers can be on the hook for thousands of dollars in real and anticipated revenue losses. Since there is no way to predict with 100 percent accuracy which finance contracts will fail, it’s incumbent on the finance professional to use all his skills and all the tools he has to mitigate those risks.
1 Originations
When a customer settles on a vehicle and it’s time to fill out the finance application it’s vital to collect and preserve accurate information. By collecting current and past addresses, getting verification of employment, non-immediate family contacts, copies of utility bills, and any other stips dealers have found valuable, dealers eliminate risk at the outset and avoid the future burden of delinquency or default.
Just as an artist selects a canvas that will last decades, you must develop a finance contract application that will stand the test of time. Has your application served you well? Do you need to make adjustments? It’s vital every agent at the dealership has every customer fill out the application the same way. Taking the time up front can avoid defaults and delinquencies and in the event they occur will save money and time.
2 Decisioning
Consistency in policies and procedures is vital when making funding decisions. It will serve you well to compare a potential deal with similar deals from the past. Did those deals result in regular and timely payments? Consistency is important in the decision process not only from an economic perspective, but also in terms of legal and regulatory compliance. You can’t treat one customer differently than another based on race, religion, ethnicity, or where they live.
Decision consistency is vital, but it’s important to keep abreast of current market conditions. For instance, during the pandemic providing vehicle financing to those in the entertainment or hospitality industries was most likely not a good idea. Before finance approval, verify all the stips you can as quickly as you can. Income misrepresentation occurs about 20 percent of the time in the BHPH funding. It’s now easy for consumers to generate bogus check stubs. If someone adds an extra $100-$150 a week to the gross income, it can be the difference between a favorable decision or a quick “no.”
Then there are issues with fake identities, false collateral, straw borrowers, and more.
Consistency and stip verification will mitigate your risks and avoid losses.
3 Collections
Once you’ve made a positive funding decision, it’s time to develop that relationship. You’ve already explained the importance of regular, timely payments, vehicle maintenance, and communication. Now it’s time for the people in your collections department to establish a relationship. More dealers now collect payments electronically. It’s good to get the payments made directly from their account for both consistency and accounting, but it drastically reduces the interaction between you and your client. Where possible, host a customer appreciation event and provide discounts on oil changes or other maintenance. This not only keeps your customer in a relationship with the team at your dealership, it creates good will, and gives dealers a chance to inspect their collateral.
Be sure your collectors are trained well and adhere to all company policies and procedures. Specified collectors should use GPS tracking devices to re-verify all stips. Verifying the customer’s home address, work address, and frequent stops, allows you to see if your customer has provided good faith, accurate information. The devices can also provide a wealth of automotive analytics that can help you in making determinations such as if a vehicle is being used for ride sharing. In the event of delinquency or default, they can provide valuable information to a repossession professional as to where and when a vehicle will be in a known location.
Advantage Automotive Analytics provides a portal to American Recovery Association repo professionals, who are certified and bonded, to collect your vehicle in the event of a default. Finding a certified repo professional in your town, state, nearby state, or across the country can be a time consuming job, and when it comes to repos, time is definitely money. Having lists of repo professionals a mouse click away will help you mitigate your losses.
As with art and science, it’s practice that produces skills that lead to success in automotive finance. Use the data and analytics gathered by your GPS devices to make current collections decisions. Should I give the client another week? Should I repossess now? Your data and analytics will tell you much. It helps you understand whether your client has been honest and forthright with you, or whether he or she has tried to lie or obfuscate the truth. Looking back on this data will assist you in making future funding decisions. When you look across the portfolio and see certain consistencies in delinquencies or repos, you’ll learn about how much risk is inherent in one kind of a deal over another. It’s your skill and your tools that will help you turn your portfolio into a masterpiece!
