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