Whether you are concerned about collecting or about meeting sales goals, there are good reasons to make sure the deals you make are well-structured. Here are three tips to make that happen.
1. Choose the right term and payment
A sound deal starts with the term. Your deal has to make sense. A low ACV unit on a long-term just because we got a good down payment? That simply doesn’t work. Not because the car won’t run the note, but because the customer won’t run the note. Fewer than half the deals we put on the books in the BHPH industry go to term. Almost a third will charge off, and another 20% will pay off early either through our effective repeat programs or from our competition.
Term should be dictated by two factors: What the customer can afford, based on their verified net income, and your appetite for exposure. If the customer can afford a $300 monthly payment and you are only comfortable with a 30 month term, then that customer’s total contract can only be $9,000. So, you can sell that customer any vehicle on your lot as long as they leave owing you no more than $9,000 in principle and interest.
Obviously, because payment is an integral piece of establishing term, it’s also an important factor in a sound deal structure. What we are looking for here is the same as term. The payment date has to be logical. Payment should be due when the customer gets paid and on their next available paycheck, barring any deferred downs.
Allowing a BHPH customer to go 30 days without a car payment without a deferred down is asking for trouble. We know our customers have had issues with budgeting money in the past, why not help them budget better by starting their payment right away? And, to help them even more, have their payment scheduled for the day they get paid. It’s an easy reminder: get paid ... make payment.
2. Select the best rate and add-ons
Interest rate is the next aspect of deal structure. Now, before I get hate mail, I’m not suggesting you shouldn’t profit from your state’s usury limits. But, I am saying that you may need to adjust this expectation depending on the term and payment deal structure. Yes, interest income is our reward for the risk. However, if the overall deal structure doesn’t make sense, your ability to collect your reward will greatly diminish.
Back end or add-on products are similar to interest in the overall scheme of deal structure. While they are great profit generators, their addition to a deal can effect payment and term, not to mention cash flow.
It’s a balancing act. You have to decide how you want to divide the money you collect from the customer. Will it go to principle and interest in order to reduce your risk and increase your reward? Or will it go to recoup cost in a product?
3. Use common sense to help the client pick the right vehicle
You can’t forget the customer in the deal structure. Yes, the term, payment, rate and additions are all critical to the hard business aspects of the deal, but you need to keep an eye on what they are buying.
Let me give you an example of a deal I came across during a consulting visit. A single mother with four children, two of whom required car seats, was allowed to purchase a Chevrolet Camaro. When I asked the dealer about it, he responded that the customer could afford the payment based on his criteria and the term was within his criteria. Okay. Yes, both of those do make sense, but common sense should tell us the deal doesn’t make sense. Sure enough, the owner wanted to be traded out of the vehicle within the first year because it wasn’t big enough.
Moral to the story? The overall deal structure has to make sense not only for you the dealer, but for the customer, as well.
Bringing it all together: Make the right deal
So, let’s review three main steps you need to take to create the most profitable deal structure.
- Term should be dictated by your exposure comfort level.
- Payment needs to fit the customer’s financial ability. Interest and add-ons need not dictate the term and payment; instead, term and payment should impact how you set up interest and add-ons.
- Not only should the vehicle fit the customer’s financial needs, but it must meet their physical and lifestyle needs, as well.