Special Report: Credit Crisis and the Industry

Publish Date: 
Dec 5, 2008
By Arlo Redwine

Not that Byers thinks of the other 20 percent of her business as insignificant. Revolving credit has had its place. “It’s nice having it around for the people that definitely can’t afford any more than $69 per month,” she says, “but we make it clear to them that it’s not to their benefit.”

Some stores may not have the know-how or technology to make a shift toward regular loans. “A lot of these mom-and-pops just don’t have the ability to do it,” Byers says. “You have to know how to format Lightspeed to print contracts or your hand-writing all this stuff.” Not to mention that some dealers don’t even own finance software.

This past summer, an HSBC rep told Dealernews that about four times more customers opt for revolving credit than for an installment loan. The bank would like to see a shift in the other direction. To this end, account executives will be visiting dealerships and offering F&I training.

The manufacturers have long encouraged installment loans through better participation on the loans. Jim Dirks of Killeen Powersports especially likes American Honda Finance, whose participation pays a lump sum pro-rated for the term of the loan. In comparison, revolving programs typically pay a percentage based on the amount financed. “These revolving ones, either you get nothing or you get a pittance,” he says.

Not surprisingly, Dirks also isn’t fond of revolving credit: “The American consumer is used to walking into stores, getting easy credit, getting easy terms, and not having to put any money up front. And they’ve buried themselves in their cars; they’ve buried themselves in their bikes. We’ve got to get away from this revolving nonsense.”

But what about the cards’ promotional value? “They’re just advertised solely to try to get your customers into the door,” says Byers, who adds that customers are sometimes angry when they don’t qualify and instead must pay the higher initial interest rate of an installment loan (which, again, is actually better for them). “There’s a little resistance, but that’s why our finance managers make some of the most money in the dealership,” she says. “They can really convince the customer that rate’s not that big of a deal.”

Plus, the promotional value of the cards might be waning. As far as zero/zero/zero deals go, some still exist, but today’s customer pays the bank for the deal instead of the other way around. “Now if you want to do zero-down, they raise your rate a point and a half,” says Maddox of City Cycle Sales. “So if you’re willing to take that hit, then you can do zero-down, but not too many people are opting to do that.”

Nick Arce of Northland Motorsports says he’s also been urging installment loans, which are now about 60 percent of his deals. He’d like it to increase them to 80 percent. “I’m pretty use to these changes,” he tells Dealernews. “It’s getting harder for us to lend, but I think maybe ethical practices and things like that will get a little bit better for us and the whole industry. It promotes repeat business. I definitely try to push installment loans. It’s just that the industry advertises the opposite.”

Converting well-qualified customers to installment loans isn’t easy. “The rates need to be competitive for one,” Arce says. “Even if somebody has a fairly decent credit score through HSBC, they’re looking at 13, 14 percent APR, and that just doesn’t fly for some people. Polaris and Honda are the only ones I’ve seen pushing toward low-rate installment loans.” Like many other dealerships, Arce has started using credit unions more often. But, he points out, “they are really hard to deal with in comparison to manufacturer financing.”

As Harley-Davidson has shown, excessively long terms and high rates on installment loans can also lead to equity problems. Says Martin of WOW: “The other big problem is we’re putting $35,000-to-$55,000-per-year-income households on to $25,000 Harleys on a 84-plus-month loan at $350 per month, and we’re wondering why they’re not paying their bills.” Interestingly, the only promo now on Harley’s Web site is for Sportsters.

Martin says finance companies have contacted him for his opinion. His suggestion? “Design a product for the middle.” (Continued)