| You might think that used car finance simple involves | | | | that much at a wholesale auction. They collect 20% |
| a dealer, a bank or other lender, and a down | | | | interest on the entire $2,400 however, as well as |
| payment on the part of the buyer. That is how it | | | | some kind of "loan processing fee" up front. This |
| works in some cases, but it gets much more creative | | | | makes their real rate of return over 40% annually. |
| than that. Let's look at a real life example, and see | | | | Of course, these are high-risk loans. I heard through |
| what lessons can be learned to apply to making | | | | the grape vine that 50% of these loans were in |
| money in other businesses. | | | | default at some point. But the finance company had |
| A friend of mine used to have a used car lot. He | | | | an aggressive collection team, which called borrowers |
| teamed up with a creative used car finance company | | | | as soon as they were a week late, and quickly |
| to sell cars to people who had trouble getting | | | | repossessed cars when necessary. |
| traditional loans. I don't recall the name of the | | | | What does that mean? As an example, suppose a |
| company, and I may get a few figures wrong, but I | | | | buyer ran into trouble and stopped paying after the |
| remember the principles very clearly. | | | | first eight payments of $200. The principle amounts |
| A typical deal might have started with the dealer | | | | had been forwarded to the dealer, but the lender |
| taking a trip to the auction. He would buy a car there | | | | would have already collected about $400 in interest |
| for $1,200 (wholesale) which might have had a retail | | | | and fees. When they took the car and sold it for |
| value of about $2,200. But because he is making it | | | | $1,100, they might net $800 after the repossession |
| easy for somebody to buy the car, he can sell it for | | | | fee and other costs. In other words, they broke |
| perhaps $3,000 after cleaning it up. | | | | even on the deal. When you make a 40% return on |
| How does he make it easy to sell at a high price? By | | | | the good deals, you can break even on a lot of the |
| arranging financing for the buyer, who typically | | | | others, right? |
| cannot get a bank loan. How does he do that? With | | | | Used Car Finance Lessons |
| a very creative finance company that rarely refuses | | | | One dealer who had used this finance company was |
| to make a loan. | | | | still receiving checks for principle years after he |
| How can they make loans to people who are a | | | | retired, so he liked the arrangement. Despite the high |
| terrible credit risk? By putting much of the risk onto | | | | interest rate, the buyers now had a car to get to |
| the dealer and charging outrageous interest rates. | | | | work in, so they liked the deal, or at least found it |
| Specifically, in this case, they would finance the | | | | better than all other options. The owners of the used |
| $3,000 car at say 20% annual interest. But they also | | | | car finance company were happy making money |
| would only forward half of the loan amount to the | | | | where nobody else dared to loan. It was very |
| dealer. The rest would be paid only when and if the | | | | creative all around, so what specific lesson can we |
| payments from the buyer came in. | | | | learn to apply when making money in other |
| In this example, then, the buyer might have to pay a | | | | businesses? Here are three: |
| $600 down payment. A young couple can put | | | | 1. High-markup products allow for more creativity in |
| together a couple paychecks to afford this. | | | | marketing and selling. |
| Payments on the $2,400 loan arranged by the dealer | | | | 2. Making it easy to buy allows you to charge more |
| might be $200 per month. As I recall, weekly | | | | for your product (or service). |
| payment plans might have been available as well, to | | | | 3. Finding a way for everyone involved to "win" helps |
| make budgeting easier for those with weekly or | | | | you make money. |
| biweekly paychecks. | | | | There are other lessons in this story of used car |
| The loan would be for $2,400, but the dealer would | | | | finance, of course. For example, in the case of the |
| get $1,200 when the sale was made - half of the | | | | lender you can see that going where others fear to |
| loan amount. As you can see, the dealer is already | | | | go opens up new opportunities. Sharing the risk is |
| okay, since he has received a total of $1,800 for a | | | | also a useful way to make things possible that |
| car that cost him $1,200. In other words, if he | | | | otherwise might not be. Of course, the buyers out |
| receives nothing more he may be able to squeeze a | | | | there might see the lesson that you pay a lot more |
| profit from these deals even after overhead costs. | | | | when you finance things, and especially when you |
| What about the used car finance company? So far | | | | have bad credit. |
| they have only risked $1,200, on a car which is worth | | | | |