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