Finance Manager 101: Cash Conversion to Finance

In this blog post, we’re going to talk about how to switch a customer from paying upfront or paying cash for a vehicle to financing the vehicle on an instalment loan at your dealership. So if you’re a finance manager, or even a sales manager, or anybody at all, and you want to learn how to do that, then stay tuned. 

So there you have it: you have the dreaded cash-paying, upfront paying customer that every finance manager hates because let’s face it, you can’t sell them anything. That is, if you’re weak, you can’t sell them anything, but that’s a whole other blog post. So you want to switch that client from paying upfront for a vehicle and convince them to put it on an instalment loan at your dealership. How are you going to do that?

Well, there are some unethical ways. Some unethical finance managers offer to give the customer a portion of whatever the bank is going to give them in the way of a reserve or reward for sending the loan. Then the customer just pays out the loan right away and the dealer keeps the money and the banks hate you and that never works because over time, the bank gets pissed off and charges you back. So how do you do it?

There are very real reasons why a client should not simply write a check for a vehicle rather than put it on an instalment loan.

Well, you know what? There are very real reasons, compelling reasons, why a client should not simply just write a check for a vehicle rather than put it on an instalment loan, so let’s just go through a few.

Nine out of ten customers are not really just writing a check from cash in their account for the car when they’re paying upfront. There is the odd one that just happens to have the money lying around, and when you run into those, you should be able to sell them something because they have lots of money just lying around, but nine out of ten people are actually paying for the vehicle on a line of credit that’s probably tied to their home or some other property or asset. So they’re not really paying cash; most customers, 90% that pay upfront for a vehicle, are doing it by leveraging a line of credit.

That’s the first thing you need to do: establish that the client is in fact paying for it on a line of credit. Once you find that out, now you have some leverage, some very good reasons why they shouldn’t do that. I’m going to give you one you may not know. Did you know that by the client putting that vehicle on their line of credit rather than on an instalment loan, they could be damaging or hurting their credit score? That’s right. Now, how does that work? How is that possible?

A key factor in calculating a credit score that the credit bureau uses when calculating a consumer score is credit utilization.

I can tell you that one factor, a very key factor, that the credit bureau uses when calculating a consumer score is credit utilization, and credit utilization is the amount of credit that is available to a consumer versus the percentage used. The higher the credit usage as a percentage of the available credit, the more it drives down your credit score. Therefore, if you have a consumer that has a line of credit against their home, and that represents a significant amount of their available credit, and then they take a vehicle, a large asset, a depreciating asset, by the way, and put it on that line of credit, they can put downward pressure on their credit score that actually negatively impacts their credit. 

Reason number two. Lines of credit are typically there in case stuff happens, in case of emergency. I was going to say in case shit happens, but that’s a little offensive, so let’s just say in case of emergencies. That’s really what a line of credit is used for.

Lines of credit are typically there in case stuff happens.

This line of credit against your home allows you the flexibility to do things at the moment. It allows you quick access to credit. That is the very definition of a line of credit. So why are you tying up quick access to credit because the whole point of having it is just in case you need it quickly, with an asset, a depreciating asset, again, like a vehicle?

Of course, the double whammy is, if you happen to be damaging your credit by using a lot of it and putting a vehicle on your line of credit, and then all of a sudden, you need quick access to credit, now, it’s possible you may not be able to get it when you need it because you’ve used your line of credit and now, the one thing I can tell you about banks that is common knowledge that everybody knows is they will lend everybody money that doesn’t need it, but when you need it, they’re not going to lend it to you. That’s kind of how it works. 

What is another reason that you might want to use an instalment loan at a car dealership rather than putting it on your line of credit or even potentially paying cash if you happen to have all that money lying around? Most people in that kind of demographic that can pay upfront for a vehicle also happen to be in the older demographic, probably 45 and up. So people that are a little on the older side more often than not are also the type that wants to pay for a vehicle upfront, put it on a line of credit, write a check, what have you. So you know what you can get when you get an instalment loan at a dealership? You can get insurance on your loan: life, disability, whatever, but certainly life insurance you can get on your car loan. 

Now, life insurance on a car loan is typically group insurance, which means that whether you’re 18 or 60, you pay the same. So if you happen to be older than the middle of that line, say 40 or 45 years old, that means that you’re getting a bargain on the insurance. Not only that, if you happen to be like 50, 55, maybe you have a few underlying health things going on, then you actually truly benefit by having the ability to buy group insurance, life insurance on your car loan without any medical. Getting an instalment loan allows you to increase the amount of life insurance you might have in your portfolio to cover that loan without actually having to get a medical to deal with that, so that is another benefit.

When you’re talking to your customers about the option of whether they should be paying cash for a vehicle or financing the vehicle at your dealership on an instalment loan, the first thing you really have to do again is establish that the reality is they’re probably paying for it on a line of credit. Explain to them why that might not be the best decision because of the negative impact on their credit and the utilization of a line of credit that really is designed for emergencies. And not only that, there are a few benefits that come along, like the ability to put life insurance on a loan, which again will transition you from somebody who’s paying cash into an instalment loan and now even getting an insurance product included in the loan, and now you’re in the money.