Subprime Auto Finance In The Post Pandemic World

Posted 3 years ago

By: Ken Shilson, CPA


Subprime Analytics



“Stay at Home Orders” are now being lifted and operators are reopening their operations to begin the recovery from the adverse impact of the COVID-19 pandemic. Their primary objective now must be to repair and replace the damage caused by the shut down and the decline in their business activity. This can’t be accomplished overnight and will take time! The proper starting point is recognition that the pandemic has been a “game changer”. The pandemic event is unprecedented in our history so business can’t be expected to return to the “old ways”. Therefore, operators must recognize and adapt to the market changes it caused which will determine how long the recovery will take. In this article I discuss several important considerations subprime operators must successfully address in the months ahead.


The “stay at home orders” and social distancing restrictions required operators to build online relationships with their existing customers and new prospects during the shutdown. Customers now expect to use the internet to originate and to close auto finance deals with little or no time inside your dealership. Therefore, operators must implement the technology needed to accomplish both of these objectives. Your website does not provide these solutions and should only be considered a start! Instead, technology used to document and close deals online (like Secure close and others) are available to help operators accomplish these tasks. In addition, web portals like “Zoom” and “Skype” can be used to visually connect with customers remotely. These tools not only offer operators ways to integrate the needed technology into their operations but they also increase efficiency. Therefore, operators must embrace new technology solutions like this and not reject them in order to be competitive and to regain lost market share.


During the recovery period capital from providers will likely be constrained for several months. Therefore, operators should not expect to borrow their way through their recovery. Subprime auto finance is a very capital-intensive business so where then will operators find the money they need if they can’t borrow it?


First, smart operators find ways to make more from less! Simply, they must operate more efficiently by streamlining policies and procedures and automating manual duties using technology, wherever possible. Technology for the auto industry has never been better so solutions are available if operators will identify and implement them. Web based integrated DMS solutions, pay portals, payment devices, texting technology and social media tools will be needed to compete and to survive in this new environment. Dealers should not defer expenditures for technology that increases efficiency and will benefit them in the future.


Internal cash management and cash flow will be critical during the next year with outside capital in short supply. Operators must review their expenditures and determine which are essential. Every expense should be evaluated to determine if they add value, revenue, profit and increase cash flow. Non-essential expenses should be eliminated promptly.


The most significant use of internal cash flow in subprime auto finance relates to your business model. In the subprime industry (and particularly buy here, pay here) no universal business model exists. That is, some operators sell more expensive vehicles, some sell cheaper vehicles, and some are in-between. This directly affects their “cash in deal” and the amount of money they put on the street at origination and the time needed for customers to pay them back. Therefore, it is important to determine if your business model is cash efficient and generates an acceptable (“ROI”) return on your investment over the contract term. The answer requires operators to compile historical portfolio performance data and to forecast future cash flow on a loss-adjusted basis. These loss adjustments should be derived using metrics like loss to liquidation (the inverse of CRR) and net static pool rates, after recoveries. If you do not already have these metrics or are unfamiliar with the aforementioned ROI calculation contact me for assistance. I have posted two brief instructional videos on the homepage of which illustrate how to compute the aforementioned metrics and they can be viewed free of charge. Your metrics can best be computed electronically from a DMS extract without utilizing any input by your staff.


Determine where you have been before deciding where you are going! In connection with NIADA, I have just compiled the most comprehensive market and trends report, to date, on the subprime industry. It contains valuable market perspectives from industry experts on technology, capital, compliance, collections, tax refunds, operating best practices and benchmark data from several contributors. Obtain a copy from me or from NIADA and compare your own results with the report data. Determine what caused any variances and identify the practices that work best by analyzing your own underwriting and collection performance and reading the report. Your portfolio performance can be analyzed most effectively using my Subprime Analytics technology. Do your operating practices need a “tune up”? If they were not working before the pandemic then why expect them to work after it? With capital in short supply you can’t afford to make trial and error and compliance mistakes which cost millions of dollars and compress your profits and erode cash flow. Learn from your losses and from mistakes of other operators so you don’t repeat them. Don’t let your compliance guard down during the recovery as your state AG is watching!


During the recovery period, you need to have a strategic business plan which includes both an operating and a financial perspective. Operators do not plan to fail but they sometimes fail to plan properly! Their plans often do not include evaluating the financial impact of their operating decisions which can exhaust available capital quickly. Don’t be guilty of this mistake; make a comprehensive review of your current business plan and operating model.


Finally, hoping that things will get better and that you will automatically regain lost market share is the wrong strategy. You must be proactive to make your recovery happen in a highly competitive environment. Success requires operators to recognize the market changes and adopt solutions quickly. Training and education guide you in that process. Therefore, don’t eliminate educational expenditures from your budget! Your recovery and your future depend on all these things! Good Luck!


Kenneth Shilson is President and Founder of NABD and Subprime Analytics which provides computerized portfolio analysis for operators and capital providers in the subprime auto finance industry. Their website is at or phone 281-723-9508. NIADA and NABD will hold a buy here, pay here and subprime convention in Las Vegas, Nevada, on September 21-24, 2020, at the Wynn. For further information and to register visit or call 832-767-4759.