The Subprime Auto Report

I recently spoke to Vlad Khayenko, finance director for Mid City Nissan in Chicago, Illinois.

Vlad has been in the auto business for about 14 years, spending the last eight as a finance director. His belief is that the best way to handle special finance business is to not have a stand-alone finance department but to blend both areas together.

There’s been some controversy over this style. I think that stand alone departments work better because they have the ability to focus on one area. Prime and subprime have distinctly different tempos, and I believe that each requires a different personality. But, that’s just one man’s opinion.

Here’s the interview:

How Long Have You been in the car business?

I’ve been in the business about fourteen years. I started as a salesperson in 1993 and have been a sales manager, a finance manager, and for about the last 8 years I’ve been a finance director, most recently here at City Nissan.

How many units do you sell a month?

We sell about 200 cars a month. About 120 of those are new.

How exactly have you structured your finance department to handle special finance business?

I prefer a blended finance department. Prime and subprime deals are both handled by one finance director. We don’t separate the way we handle prime or subprime business. Part of my advantage is having a lot of subprime and special finance experience over the years, so I feel that I really don’t need a stand-alone special finance manager to do the deals.

At what point in the sales process do you decide which bank to place your customer, or do you spot deliver?

I spot deliver. That is, unless I have a reasonable doubt about the customer getting approved. For example, somebody who has really shaky credit, with perhaps no down payment, short time on the job, and a really low score. Or someone who is a skip risk and has no stips, someone who is basically telling me, “Don’t put me in this car.” If I don’t see any light then perhaps it’s someone that I want to get approved up front. Other than that if I have any inclination that the customer will get approved one way or another then I absolutely spot them. I have found that if I have serious doubt then the customer usually does not get approved.

Basically, it’s a judgment call?

Right. Over the years I’ve seen a lot of credit applications. I have a pretty good idea of what the banks are looking for.

Now that credit decisions are minutes away, using DealerTrack for example, isn’t it worth your while to get deals approved first?

Only on specific deals where I need guidance on rate or structure. I don’t DealerTrack prime deals before delivery.

If you’re treating both prime and subprime customers the same from the get-go, doesn’t that cause problems when a customer who has credit challenges lands on a car he cannot afford?

It does happen once in a while, but it also happens with customers who have great credit as well. I am in a much better position, however, to close a deal if the customer is landed on a specific vehicle. So there is an advantage to having the customer find the car they really want. However, our salespeople often mishandle customers when they skip the road to the sale and go right to the credit application after the meet and greet.

There’s always been this controversy over whether a blended department works better or a dedicated subprime customer works better. What do you see as the advantages to doing things your way?

We’re definitely making more money this way. Secondary managers will structure deals to the advantage of their pay plan. Usually they completely skip the back end. Another problem that you typically see from these guys is a tunnel vision towards a particular subprime lender, say Americredit, Capital One, or another bank. If their lenders turn down the deal they often see no hope for the deal, and it get’s lost in the cracks. I can try my captive, for example, and see about getting the deal done. My relationship with the captive give me a flexibility that a subprime bank does not offer.

Do you get paid on the front or the back?

I get paid on the back. The point is, with a blended department, I have no advantage to having the deal funded with a prime or subprime lender. I’m going to protect the front end and the back end. We try the prime lender first. If I have a stand alone secondary guy, the opportunity to send the deal to a captive will not enter their mind, because they are not paid on that deal.

What are the advantages to sending the deal through the captive?

Funding without brain damage. Better advances. No stips. The biggest advantage is the rate. For example a Nissan tier 4 is a 10% rate. Through a subprime lender we’re looking at a much higher rate than that.

Do Lower Payments Allow You to Hold More Profit?

Of course. You can max out and possibly do better on the front end. And, if you’ve closed the customer on a payment wouldn’t you like to make more money?

If the deal ends up subprime?

Well, then we send the deal to subprime lenders. That’s the pecking order. Another point is that the salesperson pay plan is better this way.

How often do you see your captives stepping up on traditionally subprime customers?

Pretty often. I’ve seen, for example, post bankruptcy customers with previous car or mortgage history that is decent approved by Nissan, for example.

Do you see captives stepping up more than they did, let’s say five years ago?

Without a doubt. The average Empirica score is coming down for several reasons. Banks, regular banks, seem to understand now that not everyone is going to have a 720 Beacon.

How much of your business is subprime? Aside from where you place the deal, what percentage is traditonally special finance.

Twenty five or thirty.

That’s a pretty good amount.

That is a pretty good amount. But then again we’re in the city of Chicago.

What percentage of the subprime business goes to your captive?

The whole industry is changing. I’d say probably 25-30 percent of that as well.

Do your captives push back on you? Do they welcome your subprime business?

No. They don’t necessarily welcome it. I would be lying to you if I told you that was the case. It’s case by case, but I don’t know if they welcome it. They probably don’t. However, they will buy the deal if it makes sense.

Do you advertise for subprime or use other marketing tools, like special finance leads, etc?

We don’t specifically advertise for subprime, but some of our advertising, for cheaper cars for example, does attract some subprime business.

So the subprime business is not a priority for you?

I wouldn’t say that we cater to one segment of the business over another. There is no question that we value all business, subprime or prime. We don’t really differentiate one from another as we do business.

I was speaking to a Capital One rep tonight from the Atlanta area who told me that in the last several years there has been a shift from stand alone special finance departments to blended departments. Is this true because captives now regularly participate more in subprime? I’d be interested to know if secondary finance companies have felt a reduction in origination dollars due to this. I’m still of the opinion that stand-alone departments deliver more cars and drive more profit than a blended department. Most captives who approve a subprime deal cannot match the advance of a traditional special finance lender. I might be wrong.