Benefits of Structuring Loans with Irregular Payments
A common problem for many dealers is consumers not having enough money to put down on a vehicle. This situation usually results in one of three ways: you accept less, you defer the down payment, or you don’t sell the vehicle.
Here is a prime example for a vehicle that you would normally ask for $1,500 down and the customer only has $1,000 on hand. Most dealers would move this vehicle with the $1,000 and extend the contract or increase the payment structure. Some say to come back when you have all $1,500. However, there is another option.
Provide a win-win solution by structuring your loans with an irregular payment schedule; you can create a flexible payment option that works within your customer’s budget. They may not have the extra money to put down right now, but they will be able to bridge the gap when they receive their tax refund check.
What Is An Irregular Payment Stream?
This is not the same as a deferred down payment. The additional payments can extend beyond the second regular payment, and irregular payments are subject to finance charges. Currently, you may have a deal structured with pick payment, deferred down, side notes, trying to collect that extra cash. With the Irregular payment, you can remove all these options and have it structured into the contract.
Instead of settling for less today or sending the customer away, why not get a contractual obligation to $1,000 down, payment one through eights at $70, payment nice at $750 (tax refund time) and 10-100 back to $70?
Take Advantage of Tax Season
One of the biggest benefits of an irregular payment schedule is your ability to take advantage of tax refunds.
Based on NABD benchmarks, February is the highest cash down month based on the influx of dollars from tax returns. Most dealers use the money as a deferred down payment or pickup payment. But, as we’ve discussed, structuring the loan with a larger irregular payment in February will not only allow the loan to pay down quicker and provide better cash flow, but also give you the additional interest income on a larger principal amount.
And Remember, Tax Season Is Yearly
Based on the statistics derived from tens of thousands of annual federal returns, Tax Max has documented that in the special finance and BHPH markets, tax refunds average in excess of $5,300 when children are on the return. Meanwhile, 40 percent of refunds are greater than $6,000, and 10 percent are nearly $10,000 or more.
A suggested irregular payment of $750 is relevant enough to a dealer’s bottom line to make a difference on the books. At the same time, $750 does not destroy the customer’s budget in February. With an average refund of more than $5,300 to play with, enough is left over for their annual spending spree.
Make It Annual
What’s better than a single tax return down payment? Several of them. Instead of using the tax return for just a down payment, write it into the contract as a yearly recurring large payment.
Remember — not all dealer management software can accommodate irregular payment streams. In order to contract irregular payments, you will need a DMS that can not only correctly calculate them, but also accommodate the number of irregular payments you need.
Tax Max has partnered with Auto Master Systems to pioneer innovative technology that will allow dealers to build in an annual tax time payment into their customer’s retail installment contract. This program will be launched in 10 states including: Oklahoma, Pennsylvania, Virginia, Florida, Georgia, Tennessee, Arkansas, Indiana, North Carolina and Texas with more states to follow.
Contact Auto Masters to get additional information about your state.
Increase Interest Income
In accordance with Regulation Z, irregular payments are written into the financed amount and can accrue interest; unlike deferred down payments, which cannot.
Interest income on a few payments for one account may not amount to much, but think about the effect it would have on your entire portfolio.
Shorten Your Cash-In-Deal
Structuring irregular payments into a loan can shorten the life of your Cash – In – Deal (CID). Cars cost more than ever before, and yet payment amounts and down payments are staying the same. As a result, terms are increasing along with your CID.
If you are able to add a $50/month increase to the payment amount for the first six months of the loan, you could observe a significant reduction of your CID for each car and shave off one to three payments of the term.
Increase Your Credit Line Draw
For dealers with lines of credit, typically the deferred down is not included in the borrowing base because it is not principal. However, because the irregular payment is included in the principal, it affects your draw amount.
For example, a lender will advance 55 percent of the principal amount. The dealer schedules an extra $1,000 payment during tax time on his accounts.
He is now able to add $550 per loan to his credit line drawing. With an average of 60 cars per month, this is a $33,000 additional line draw he can qualify for, just by scheduling irregular payments on his loans.
Mike Downey is the vice president of sales and marketing at Auto Master Systems. Downey has spent over 16 years in the buy-here, pay-here industry developing and implementing technology solutions for dealers and finance companies. He has served as vice president of business development for a 26-store BHPH operation and has provided consulting and training to hundreds of dealers across North America. He is a regular presenter at nationwide industry events where he speaks on how technology can help BHPH operations. More details can be found at www.auto-master.com.
Chip Wiley is the corporate trainer and marketing specialist for Tax Refund Services and Tax Max. Wiley can be reached at (813) 987-2199 or email@example.com.