Talking financing up front could ease friction

The traditional order of operations at a dealership has the customer selecting a vehicle based on its sticker price or perhaps a perfect-world monthly payment. It's not until the end of the process that everyone learns if the customer can actually afford one of the most expensive things they'll ever buy.

A better path might be to take a note from those buying homes — the biggest consumer purchase for most people — and figure out how expensive a vehicle they can afford. The customer and salesperson can look for something in that price range.

If a dealership fails to address affordability up front, it's likely to foul the deal later, according to West Herr Auto Group marketing director Matt Lasher. During a Chernek Consulting "Digital Age" forum April 7, he gave the example of a customer who selects a Cadillac Escalade only to have the F&I office nix the deal.

Everyone winds up frustrated and "all this pain" arises because affordability wasn't dealt with earlier.

"That is a huge, huge blind spot," Lasher said.

Many dealers presume they deal only with prime customers, he said, and even West Herr has fallen into this bias.

Lasher said it's a "huge, huge, huge misconception" to think a majority of customers don't have budget sensitivity.

The latest Experian data available indicates 65 percent of all vehicle buyers and lessees during the fourth quarter of 2021 held at least a 661 credit score, the point the credit bureau considers someone to be prime.

That means 35 percent of the market had near-prime or worse credit. Of those, 15 percent of customers were subprime or deep subprime with scores of 500 or lower, Experian said.

Lasher argued many ostensibly prime customers might have affordability issues. Perhaps they're buying a third car or have significant student loans, he said.

Lasher said dealerships don't run credit up front because sales staff tend to take the path of least resistance and go along with the customer. A salesperson will simply say, "Let's go look at the Escalade" rather than seek clues as to whether the purchase will be feasible, according to Lasher.

For example, a salesperson could ask if the customer had owned one before, or inquire what vehicle is being traded in, he said.

"The dealers have done a great job of finally giving the customer the price, but now they're holding back on the financing," Pete MacInnis, CEO of eLEND Solutions, told Automotive News during the NADA Show in March.

In real estate, people shop for homes they know they're preapproved to afford, Lasher said. In "Carland," consumers submit leads and dealerships try to make it work, he said.

Lasher encouraged dealership staff to take the initiative to identify affordability issues and propose vehicles that make sense based on that set amount.

During the Chernek online forum April 7, StoneEagle's senior vice president of business development, Joe St. John, shared an NADA study that found less than 5 percent of dealership websites had a payment calculator in 2018. But in 2021, it was "greater than 90 percent," he said.

MacInnis faulted dealerships themselves for presenting a best-case payment scenario to the customer online. When the customer reaches the store, "everything the customer expected or got online doesn't follow through."

Another strategy might be for dealerships to offer a "soft" credit pull for the customer up front.

This credit check offers less detail than the traditional "hard" pull, but it doesn't affect the customer's credit score and it still gives dealers and consumers a sense of what's possible for the customer.

Ken Hill, managing director of 700Credit, told Automotive News his company's two soft-pull tools are its fastest-growing products. They're meant to be used at the "top of the sales funnel" to eliminate the kind of end-of-the process "mess" described above, he said.

He called it important in digital retailing to run a soft pull first. "It removes that friction," he said. It also lets dealers have "better conversations" with customers, he said.

MacInnis said lenders deserve blame too for keeping the process backwards.

Artificial intelligence replacing traditional, predictable rate sheets has caused some creditors to hold off on offering terms until they can see the final negotiated proposal from the dealership and customer.

"That's a big disconnect," he said.