Watch for more direct lending

I was struck recently by a subprime lender chief's fairly benign observation.

"We know the amount of Internet leads on the car purchasing side is a pretty big number and growing," Jim Landy, CEO of CarFinance Capital, told me. "It doesn't take a lot to think that would extend to financing."

If Landy's right and more consumers start taking out direct loans via the Internet, that would have a big impact on many dealerships' operations. It would mean needing to tweak the finance and insurance sales process, for one thing.

Many finance managers say that some subprime auto loans aren't large enough to cover extras such as service contracts, GAP, wheel-and-tire protection and other items.

And those are important products for dealerships because they often carry at least a 50 percent profit margin.

Only about 20 percent of CarFinance Capital's loans are made directly to consumers, Landy said. But he suspects that amount will rise.

"It's attractive to a borrower to do the approval online with anonymity, then walk into the dealership and do the transaction with their own financing already in pocket," Landy said.

With a nod to this trend, CarFinance advertised last month on Edmunds.com. And Landy is preparing to do more online advertising, he said, although he declined to give details.

Landy also said he expects the number of indirect car loans — those arranged for customers by dealerships — to rise in the subprime space. National statistics show that almost half of consumers have credit scores that qualify as subprime, he said.

That means dealers will have to become even more diligent in searching for lenders that will finance the back end of the deal. Losing that $1,000 or so for a service contract or a GAP policy will not be an option.

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