You might think that used car finance simple involves a dealer, a bank or other lender, and a down payment on the part of the buyer. That is how it works in some cases, but it gets much more creative than that. Let’s look at a real life example, and see what lessons can be learned to apply to making money in other businesses.
A friend of mine used to have a used car lot. He teamed up with a creative used car finance company to sell cars to people who had trouble getting traditional loans. I don’t recall the name of the company, and I may get a few figures wrong, but I remember the principles very clearly.
A typical deal might have started with the dealer taking a trip to the auction. He would buy a car there for $1,200 (wholesale) which might have had a retail value of about $2,200. But because he is making it easy for somebody to buy the car, he can sell it for perhaps $3,000 after cleaning it up.
How does he make it easy to sell at a high price? By arranging financing for the buyer, who typically cannot get a bank loan. How does he do that? With a very creative finance company that rarely refuses to make a loan.
How can they make loans to people who are a terrible credit risk? By putting much of the risk onto the dealer and charging outrageous interest rates. Specifically, in this case, they would finance the $3,000 car at say 20% annual interest. But they also would only forward half of the loan amount to the dealer. The rest would be paid only when and if the payments from the buyer came in.
In this example, then, the buyer might have to pay a $600 down payment. A young couple can put together a couple paychecks to afford this. Payments on the $2,400 loan arranged by the dealer might be $200 per month. As I recall, weekly payment plans might have been available as well, to make budgeting easier for those with weekly or biweekly paychecks.