Used car finance

Ford Credit is testing used-vehicle leasing and subprime financing.

The latter has been the primary activity of the two-year-old Fairlane Credit, headquartered in Colorado Springs, CO.

But there are name-recognition reasons for Ford Credit wanting to participate in subprime lending, too.

Thomas F. O'Connor, business strategy manager for F&I development, spearheads Ford Credit's new initiatives.

Mr. O'Connor is a 15-year veteran of Ford Credit. He previously was a dealership F&I manager in his native Pittsburgh.

In the first pilot program, Ford Credit is using pioneering "business centers" as test modules at dealerships for enhancing secondary finance.

The second pilot program is the relatively untried phenomenon of used-vehicle leases.

"Only 4% to 5% of all the vehicle leases apply to pre-owned units, and we see this area as having great growth potential," says Mr. O'Connor.

He adds, "The hundreds of thousands of pre-owned vehicles coming in off-lease, with factory warranty often still outstanding, would seem to be great sources for re-leasing.

"Ford Credit does not want to be absent from such a market."

In secondary financing, Ford Credit has found that, while Fairlane Credit gains ground, its own brand commands such awareness among dealers and owners that there's a role for Ford Credit and its logo in secondary as well as primary lending.

Mr. O'Connor says, "Forty million used vehicles are sold a year in the U.S. of which about 15 million are sold by franchised dealers. That's one-on-one with new units. Ford Credit's main mission is to support new and repeat Ford-made vehicle sales.

"Making nonprime loans available to qualifying purchasers at our dealerships, even on non-Ford brands they have taken as trade-ins, would reinforce our mission."

The novel Ford Credit business centers opened last spring at Metro Ford Sales, Inc., Schenectady, NY, and Sill-Ter Har Motors, Broomfield, CO.

Ford Credit staffers managed them for a year. They helped train F&I personnel to create an "non-adversarial" environment.

Ford Credit plans to help run the pilot centers and plans to open others, says Mr. O'Connor.

It is the first of the captive lenders to operate F&I offices, managed by its own employees, at dealerships.

Meanwhile, Fairlane is a year ahead of its timetable to become operational in all 50 states.

President Jerry Heimlicher plans to reach a nationwide goal by 2000, having opened Fairlane's eighth regional office in New Jersey in March. That exceeds a coverage range of 2,500 Ford, Lincoln Mercury, Jaguar and Mazda dealers.

RELATED ARTICLE: Subprime market risky but too good to pass up

The subprime lending market has its risks. Even riskier are "buy-here/pay-here" financing contracts.

But subprime opportunities are too good to avoid as more and more consumers fall from the prime lending class.

That's the word from veteran dealer CPA Carl Woodward, of Bloomington, IL. He says the special finance market for new and used vehicles could grow as much as 40% in some markets.

Repossession rates as high as 35% on "pay-here" dealer-finance loans and nearly 20% on subprime contracts fuel the horror stories.

But that shouldn't frighten dealers away from subprime, states Mr. Woodward.

Those who hold back limit their sales opportunities. "And market shares in new and used cars and trucks will shrink."

Repossession loss concerns should be weighed against the fact that reclaimed vehicles that are resold either by the dealer or the financing institution reduce the bottom-line loss to the 8% 15% range, says Mr. Woodward.

He adds that subprime financing providers and dealers specializing in that sector are seeking a formula that could lower the large repo rate and resultant write-offs now troubling the area.

RELATED ARTICLE: Dealer, son of former GM president, keeps lease customers coming back

One of the best dealerships in the country for leasing retention is Bill Estes Chevrolet, Indianapolis.

Owner William Estes, son of the late GM President Elliott M. (Pete) Estes, says up to 66% of lease customers sign up for new leases.

That's thanks to a concerted focus on the process which the dealership began in 1993.

"We really embraced it from the start," Mr. Estes says of leasing. "Fortunately, despite the skepticism from other dealers, we guessed right that it was going to become as big as it has."

Currently, Bill Estes Chevrolet leases about 45% of its new vehicles and 20%25% of its used ones.

The overall tale in the mid-1990s never fell below 40%, with or without factory incentives. The retention rate for lease, loan and cash customers is close to 75%, says Mr. Estes.

He says the shorter lease terms, compared to financing arrangements, means lessees end up with two subsequent vehicles instead of only one which a four- or five-year loan would buy them.

"The key is keeping leasing at the top of the agenda at every sales meeting," says Mr. Estes. "Also, every time a shopper comes to the sales desk, he or she is told about leasing.

"It's front-burner for us. As a result, it establishes an obligation from the purchaser to the dealership that isn't present with long-term financing."