Given the changing political climate, many powersports dealers are taking a “wait and see” approach to their 2017 planning. Whether you believe the market will grow or shrink, there is one area of your business you can improve – the relationship between dealer and lender.
During a recent powersports dealer conference panel, dealership owners and lenders shared their challenges when working with their counterparts. For many dealers, offering financial options is new territory. There is much to learn and every lender markets their products differently. Without a background in banking or finance, many dealer team members are uncomfortable with the financial side of the business. And then, there is the compliance minefield to consider. Compliance regulations indicate that a dealership must offer every product to every customer. If your team does not understand the F&I products themselves, explaining them to customers is challenging.
How can you bolster your relationship with your lender…and boost your financial acumen at the same time? In the spirit of bringing dealers and lenders together in the middle, I’d like to share some of the key issues and careabouts facing lenders today. Next month, I’ll address the challenges facing dealers. Then in February, I’ll talk about how both sides can meet in the middle to build a productive and financially beneficial relationship for both lenders and dealers in the powersports market.
For lenders, mitigating losses has become a primary issue. For example, losses in 2014 totaled 19% on average. That percentage increased to 30% in 2015. And sling shot losses have almost doubled. If consumer discretionary income is up, why the increase in losses?
One reason is the way in which credit is assessed. Since the recession, lenders have taken a much closer look at the overall financial health of the potential customer. Consider these changes in how credit is determined post-recession:
- FICO has a new competitor called VantageScore, with different scoring metrics. Both now factor in “alternative data” such as on-time rent and utility/phone/cable payments as part of the credit history.
- Dodd-Frank now requires all lenders to disclose the credit score they used to determine the underwriting offer, or when credit is denied. And the Fair Credit Reporting Act stipulates that every person can access a free credit report annually. With this knowledge, creditors “expect” consumers to tidy up their credit history, and rank negatively those who are not pro-active.
- While credit card payments have always been a part of the overall credit score, companies now include up to 30 months of trended credit card data for a snapshot of the consumer’s payment history.
- Paid collections are not factored into the overall credit score – no points earned for paying off old debt.
With a closer scrutiny on consumer credit, lenders are now valuing some traditional prime loans as sub-prime. And the near-prime market is growing to fill the gap between the two. The days of pulling a credit report, seeing a “decent” score and offering a loan are gone. Now, lenders have a wealth of data to determine the credit health and habits of the potential customer. And they use a finely-tuned microscope to look at that data.
Understanding how credit history is assessed, and the resulting credit score, offers insight into how a lender will view your potential deal. You might see a great customer with a passion for powersports. Your lender sees a credit score and the percent potential for risk. Look for my next article where I will share some of the challenges facing powersports dealers. Then we’ll see how we can all meet in the middle for a more profitable 2017.