Posted by Brandes Elitch on Mon, Dec 16, 2019 @ 10:45 AM
Two of the most frequent questions asked by consumers at auto dealerships are: “Can you help me get a loan to buy this car?” and “How much of a down payment will I need to make?”
As a dealer, you had better have the answers accurately and quickly, or you might lose the sale. It turns out that these are not always easy questions to answer because, well, they are complicated.
In this short article, we are going to address both questions and take a further exploration of the customer credit journey at your store. More importantly, we are going to answer the question: “How can auto dealerships help consumers with down payments?”
You will learn how to provide a good customer experience, get the taillights over the curb, and inspire good reviews on social media.
How Do Consumers Shop for Autos?
Let’s start with the reality that about 80% of the time, the consumer in need of financing is going to end up getting it at your dealership.
Yes, I know that in this day and age of the connected consumer, big data and data monetization, you would think the consumer would have their financing all ready to go when they come on the lot. After all, the average consumer spends 3 – 4 hours or more searching the web for information about the cars that they are considering before they even go to a dealership. They narrow their search for a specific make, model and color, and then they compare prices and cars available from other dealers in the area.
They want to show their friends and family what a great job they have done with their research, how smart they are, and why they are going to get their car at the best possible price. Why wouldn’t they just go down to the local credit union and get pre-approved for the car that they have chosen, particularly when the rate is currently in the 3% area?
There are a couple of explanations.
How Do Consumers Shop for Financing?
One is that the consumer is often intimidated in dealing with the bank instead of the dealer. This could be because they have less than stellar credit. A look at the credit default statistics for car loans shows that for loans originated at a credit union, the default rate is 1%, and for loans originated by banks and dealer captives it is 6.5%. It turns out that credit unions have pretty high standards, but many consumers do not fit the credit union mold.
A recent Experian study (Q4 2018) shows that 34.8% of Americans studied fell in the subprime category (FICO score of 580-669). The average subprime score is 577 versus the national average of 701. Interestingly, a subprime credit would have an estimated income of $65,813, versus an average of $79,054. But where the statistics really jump out is the average total debt, which is $53,263 for subprime and $93,446 for the national average.
Statistically, about a third of the consumers who come into your dealership could be subprime. They are most likely going to be shopping for a used car, because the average used car price today is around $20k. The average price of a new car today is around $38k, almost twice as much. Many consumers can afford a used car but not afford a new car. This is just fine for the dealer, as they will typically make about the same net dollar profit on selling a used car as a new car, and have much less capital tied up in the sale!
The other reason might be that the consumer just assumes that the manufacturer you represent will have their own finance company, and they will be easier to deal with in putting the loan together.
Do Consumers Check Their Credit Scores Before Shopping for Financing?
A smart consumer would want to check their credit score before going to the dealership. However, they would not know that the dealer might be using a different credit score. In 2017, the CFPB fined TransUnion and Equifax more than $5 million in fines and $17 million in restitution for deceiving consumers about the credit scores that they purchased. It turns out that there are separate credit scores for different industries and loans, such as the mortgage industry and the insurance industry. Consumers went to the TransUnion and Equifax website to buy their credit scores, without being told that the scores they bought would be different from those that the dealer was actually using!
The score the dealer uses is designed to predict the risk of default in the first 24 months. Auto scores focus on factors that are not in the typical credit score. They include:
- Recent bankruptcy, especially involving a car loan or lease.
- A short credit history.
- Using a credit repair provider.
- Late payments on a car loan.
- Previous collections on a car loan.
Applying for a loan under any circumstances is nerve-wracking for most consumers. Only a small percentage of consumers are going to pay cash for the car, probably around 10%, depending on the make. You want to make the credit journey as painless as possible. Here are some ways to do that.
Making it Easy for Consumers to Make Down Payments
When it is clear that the customer is serious about buying a car, tell them you want to make it as easy as possible. Ask them to let you appraise their trade-in right away, which they can use as part of the down payment. Ask up front so it doesn’t delay things later on.
If they don’t have a trade in, ask how much money they can put down, or if they want to finance the whole purchase. Explain that making a down payment can help them get a car loan, or a bigger car loan than without the down payment. Ask them if they have been pre-approved somewhere else. Ask them if they have recently pulled their credit score, and ask if you can do that now to save time. Explain that you work with many different lenders and you want to help them get the best rate. In extraordinary circumstances, ask if they can get a co-signer. You want to reassure the customer that they will be approved for a loan and you are just trying to get them the best possible deal.
The reality is that you can probably get a loan for most people who walk into the dealership; the main variable is how much they will pay in interest over the life of the loan. A poor credit history means a higher interest rate. One way to help is to ask for a down payment, which shows good faith in the part of the consumer and would cover the initial depreciation if the loan defaulted.
How Can Consumers Make Down Payments without Financing?
This is where CrossCheck’s Multiple Check premium can help the dealer make the sale. When a down payment is required, and the buyer just does not have that much money right now – don’t worry!
Ask the consumer, “If we gave you an extra 30 days to make the down payment, could you do that?” Most of the time, they will say yes. If so, let the consumer write a check today for the first part of the down payment, and choose three other dates and amounts for the next three payments.
This makes for a good customer experience: the consumer sees that you are really trying to help them because they are not being charged interest for this solution. It is a free service. The dealer is just waiting a little longer to get all of the down payment, but they are selling a car and getting it off the lot today, which is what this is all about, isn’t it.
Now we have a satisfied customer, who tells their friends on social media how nice the dealer was to work with, and how much they like their new car. This is called viral marketing. You want happy customers, and you want them to come back to the dealership for service, and to buy their next car. The CrossCheck Multiple Check solution is a win-win for everybody!
Download our free guide to learn how to help consumers make down payments.