Hammer Time: Forays Into Finance

When I was a kid, I really thought debtors could end up in prison. My Dad grew up in Old Europe (pre-WWII) and with memories of German hyperinflation, depression and Nazism came a very firm belief in paying cash . . . no matter what. Conservative isn’t the half of it. He simply can’t stand the very idea of investing in any asset that can only depreciate over time. For the last ten years I embraced the same attitude of “neither a borrower or a lender be.” My customer has always been the ‘cash’ customer. That is until the debtor’s economy hit my fleet of automotive mules with a proverbial 2 × 4.

Now I finance and let me tell you, it ain’t easy. Asking lots of questions and figuring your customer out BEFORE giving them the keys takes an education. A lot of dealerships start with the owner’s credit history. I don’t because it doesn’t tell me anything as to how they will maintain MY car. I start with the car they drive in on. If that vehicle they come in has been neglected, abused or ragged out, mine could be next. Those folks thankfully do not become finance customers, and more times than not they don’t have cash either.

Some places will finance anyone within a 100 mile radius. Tracking equipment and password laden disablers help lower the risk considerably. But they’re also expensive and a nice side living can be had by disabling these systems. Most of what I finance will cost anywhere from $800 to $1500 at a wholesale level and I’ve found that forking out that money on a per car basis is not really necessary. A friend of mine who is a top ten buyer at two different dealer auctions has only financed within a 10 mile radius for over 20 years. Outside of that radius, your level of risk goes up dramatically. I’ve taken this to heart and followed the exact same policy.

Also, I cater to the non-enthusiast buyer and have cars that reflect it. I buy a LOT of minivans. They are the anti-image cars, and along with Buicks, Volvos and other “older person” cars, they attract the type of folks I like (those who are simply looking for point A to point B transportation). The teenage daughter who has their parents under their thumb may not like the family cars. But an awful lot of single parents who work long hours see these cars, and the Carfax reports that denote the car’s history, as a good match for their families.

Along with always offering the Carfax history, I try to minimize the risks and costs for my customers. Within five minutes, most folks realize how much I hate debt AND how much I know about their own car. To encourage a quick payoff, I offer “60 days same as cash” where if they pay for the vehicle in full by that time period, I charge no interest. Period. About a third of my customers can pull that off and I always get repeat business and referrals by offering it.

The rest have payments that are between $40 and $60 a week, and will pay off the vehicle over a 50 to 75 week period. The longer the length, the higher down payment I require because of the greater risk. Contrary to the decades old myth, my down payment is rarely my equity in the vehicle. It usually takes about two to three months to even that out.

I also make ownership cheap and maintenance intensive. Every Friday, I have the fluids and tires of each vehicle looked at to make sure leaks and other mechanical issues get caught early. A hose may be $10. An engine is fifty times more expensive. Oil changes are offered every 3k miles at the same price as Wal-Mart ($25) and can usually be done in less than 30 minutes.

Finally when mechanical issues do creep up, I offer a free loaner (they have to insure it) and the cost of repair is simply attached to the back of the loan. The labor rate is $50 with no parts mark-up, which works out to about half what nearby places will charge them. Thankfully I only had to do this once, and it was for a truck heater control that required a $50 blender motor.

So far it’s worked out. I’ve had only one repo and that one I got back quick. Most of my customers have actually bought a second vehicle from me, and two of them are planning on buying a third after their refund check comes in. The economics of financing are working. But there isn’t a day that goes by where I consider the potential ramifications of essentially becoming the bank of Steve.

[Steve Lang buys and sells used cars for a living.

For more information, please contact steven.lang@duke.edu]