In the ever-evolving world of auto finance, dealerships now have the opportunity to maximize their profits while maintaining control over their capital. Thanks to rapid innovation in data science, artificial intelligence, and machine learning, dealers have new options to meet their capital needs and increase revenue without sacrificing the customer experience.
Traditionally, dealerships relied on lenders to secure capital, but this meant sharing a substantial portion of their profits. With the limited availability and inconsistent appetite of capital resources today, dealers should explore alternative funding options leveraging a program that enables them to become their own lending source. By doing so, they can keep more of the upside profits and maintain control of future cash flow while fueling the growth of their dealership.
To successfully transition into being your own lender, it’s crucial to run your dealership like a finance company. Here are some guidelines to help your dealership succeed.
Know and work your numbers
Take a deep dive into your dealership’s performance metrics. Make sure you understand your capital provider’s portfolio reporting and how these metrics are impacted by consumer credit data and loan structures. By analyzing these numbers, you can identify areas for improvement and scale your business for future growth.
Streamline processes
Identify and eliminate inefficiencies within your dealership. Automate tasks and leverage technology to save time and improve productivity. Consider outsourcing certain functions, like loan servicing or reconditioning, to free up more time for revenue-generating activities such as sales, business development, and building up inventory.
Originate quality loans
Follow your capital provider’s suggested underwriting and loan structure guidelines when originating loans. Ensure that customers are placed in the right vehicle and that the payment terms align with their ability to repay the loan. Don’t be afraid to walk away from a sale if the numbers don’t make sense.
Optimize pricing
Utilize data to determine the best pricing strategy for your vehicles. Charging the highest price isn’t necessarily the most profitable approach. Instead, focus on customers paying to term rather than defaulting. Strive to provide payment plans that customers can comfortably manage, avoiding the need for repossession.
Build relationships
Recognize the lifetime value of loyal customers. Foster strong relationships with your customers and the community. Positive relationships can enhance customer loyalty, generate referrals, and reduce defaults. Be a resource for customers facing payment difficulties and find solutions before a loan defaults.
Stay informed about trends and regulations
Keep up to date with industry trends and regulations to ensure your lending practices are compliant and sustainable.
To optimize loan performance and outcomes, incorporate data analytics into your business model. By leveraging artificial intelligence (AI) and machine learning (ML) technologies, dealers can assess risk, decide which loans to retain, and identify better customers. Partnering with alternative lenders or fintech companies that specialize in data-driven lending solutions can provide valuable insights and historical results to inform your decision-making.
The power of data is transforming the non-prime automotive sector, opening up capital markets previously inaccessible. Companies like Agora Data have demonstrated 99 percent accuracy in projecting non-prime auto loan performance using more than $350 billion of back-tested data. This level of certainty empowers dealers to access the capital they need to better serve their business and tap into an underserved market segment.
It is crucial for dealers to continually evaluate and refine business strategies and processes to remain effective, safe, and sustainable. By implementing the strategies and resources outlined in this article, auto dealers now have the ability to optimize loan performance, finance more customers, increase revenue, access capital resources, and keep more cash, all while keeping the customer.
So, who makes more money, you or your lenders? The answer is clear: as a dealership becomes its own lender, you can
have the best of both worlds. By keeping more of your cash and maximizing your profits you can achieve long-term success and live happily ever after in this story that is far from a fairy tale.
Featured article provided by Used Car Dealer Magazine (August 2023/Vol. 52: No.8) written by Brett Beebee, Chief Revenue Officer at Agora Data.