by Victoria Fierson
The credit crunch sent shockwaves throughout the American economy. The ride has been that much rougher for automobile dealerships, one of the economy’s major touch points for consumer credit.
The result for dealerships: significant day-to-day business challenges.
“Getting people approved for credit is the most difficult thing for us right now,” says Brianna Tozzo, sales representative at Acura of Westchester, N.Y. “This month we’ve had 17 cars on our sales sheet that were not able to be delivered. Of the 17 incomplete sales, 10 had to be put aside because the customer had poor credit. Sales have declined about 30 percent over the last month due to less available credit and more stringent credit standards from loan institutions.”
Acura of Westchester is trying to work its way through the problem, relying more on America Honda Finance, the captive for Acuras.
“In addition to Honda, we previously used Chase, but we stopped because their standards were even tighter,” Tozzo says.
The scramble for lenders is not restricted to Tozzo’s dealership. Igor Tselnik, the finance manager at Premium Nissan Ltd., located in New Rochelle, N.Y., is facing a similar struggle.
“We have other lenders in place, but what we’re finding is that we are going to our main source a lot more often than we used to,” Tselnik says. That wasn’t always the case. “Outside companies used to offer preferential rates for certain customers, but lenders are no longer looking to increase business; they’re looking to decrease business,” he says.
Overall, financial institutions are still lending, but they are analyzing loan applicants more critically. For example, lenders are delving into the applicant’s job, how long he has been at the current job, and is his recent debt payment history. “They’re even asking why customers didn’t pay more than the minimum on their Gap card payments,” Tselnik says.
Normally, dealers would fall back on their core lending relationships with a handful of go-to financial services companies. But the dire economic conditions have eroded dealer-lender rapport, even among long-time business associations.
“The dealer-lending relationship does not hold much weight anymore,” says Brad Horton, a financial advisor at Benders Honda in Clovis, N.M. “If the deal isn’t structured properly, if it isn’t a ‘win’ situation for the lending institution, it is much harder to get the deal put together.”
Dealers are not getting sympathy from lenders. Credit exceptions are non-existent. The most critical concern for dealers is now the consumer’s credit score. The linchpin in the automotive market is credit today – and that puts the credit score centerstage.
“A month ago we didn’t have to worry about it,” Tozzo says. “Now, we have to base what we sell a car for off of some- one’s credit. If someone has poor credit and they even qualify for a loan, their monthly payments could be between $20 to $40 higher.”
Many dealers are asking customers to put more money down to help them qualify for loans. “A customer I had last month was a victim of identity theft,” Tozzo says. “His credit was completely ruined. There was no way he was able to qualify for a new car loan, so we were looking pre-owned cars. In order for the deal to go through, he had to pay half of the car off in cash, which came out to about $15,000. The other half he was able to finance.”
To dealers, the whole lending melt- down seems to have put them in a bad spot. Scott Lee, finance director at Front Range Honda located in Colorado Springs, Colo., says, “Unfortunately, we’re at the mercy of the lenders — and the customers able to buy cars a year ago are not able to buy right now, because banks are not buying higher risk. Each deal is evaluated on an individual basis.”
Lee also says his associates are asking for more money down to help the customer qualify for the same loans they would have gotten a year ago with ease, and they are doing that to encourage their lenders to lend. “We have a pretty decent range of banks lending already,” he says. “Any other banks we bring on are not going to do anything differently.”
Dealers have also taken a more active role in assessing a buyer’s credit, which is normally left to the dealership’s fi- nance department. “Normally when you go through the credit process, asking the customer what their credit score is one of the last questions; that usually happens when they get to the finance department,” says Tozzo of Acura of Westchester. “Now salespeople are expected to do more credit screening when a customer walks into the dealership.”
That active role includes addressing credit issues earlier, because in order to make sales, dealers need to focus on getting consumers into an affordable car — with a loan to do it.
“We’ve had to become more diligent and take more time out to interview customers from a sales perspective,” Premium Nissan’s Tselnik says. “It is not in our best interests to spend a lot of time with a customer to find out that they’re looking at a vehicle that a bank will never qualify them for. We want to know the battle upfront, and be able to suggest the best option for our customer right up front.”
All this tumult in the lending landscape has come amid a significant change in consumer preferences in cars. Namely, compact cars are hot, SUVs are not. Part of this shift in can be attributable to lending institutions, which are showing a preference for extending credit for more fuel-efficient vehicles.
“Lenders do not want to finance Pathfinders or Armadas,” Tselnik says. “They don’t want to tie up capital in these markets. Dealers are not able to offset the interest rates and higher loan costs enough, even with incentives to counter the lenders rates.
“Right now lenders are offering better deals on compact cars and sedans,” he says. “Typically, they are less expensive than SUVs, and the risk involved with taking on one SUV loan could cover multiple compact car or sedan loans.”
So what are dealers doing? First, they are encouraging customers to take shorter lease terms that would increase their monthly payments, but are much beneficial in the long run. “If the customer is able to take on a bit more financial responsibility every month to make those higher payments, when the loan term is over, say two years down the road, they will have lower interest rates and payments,” Tselnik says. “It may be a stretch at first, but it will ultimately work in the customer’s favor.”
