Prequalification has long been a method automotive lenders use to lock in buyers before they even arrive at a dealership. It is a strategic tool that gives consumers confidence that they can successfully finance the transaction while also raising the likelihood that dealers can close the purchase.
Facilitating the prequalification process into something that is immediately meaningful and beneficial to the lender, dealer and buyer, though, requires some nuance. For example, consumers who may have moderate budgets are not ideal prospects to finance luxury or high-performance vehicles. A good prequalification process should recognize the fiscal limitations of these customers and serve as a lead-generation mechanism to dealers who are eager to close deals that are structured according to budget.
Why prequalification matters to lenders
Consumers tend to stick with financing companies that prequalify them, giving lenders an incentive to front-load the approval process. And when the prequalification process takes place within the loan origination platform, the lender can maintain communication with the applicant even if they abandon a potential purchase. This deepens the customer relationship and helps mitigate customer churn.
We’ve seen this dynamic manifest itself in positive “look-to-book” ratios for prequalified borrowers. In the sub-prime space, up to 50% of prequalified applications tend to close, and in the prime space, the rate improves to 70%. Prequalification creates a “stickiness” and a connection between the applicant and the lender, no matter where they eventually acquire the vehicle.
Shopping by payment, not by asset
Prequalifying buyers by payment, instead of by vehicle, begins the customer’s journey from a different, but perhaps more realistic and productive, place. By using the prequalification process to help a consumer determine their budget and establish a payment structure they can afford, the buyer can enter a dialogue with the dealer with a common understanding of what is affordable.
This model gives a framework to both the dealer and consumer to find a vehicle that works from a feature, style and budgetary perspective —something the “shop by vehicle” model does not. Armed with the knowledge of what the consumer can afford, the dealer can curate a selection of cars for the prequalified applicant and end up with a much greater likelihood of success in completing the transaction.
This helps create a friction-free, satisfying customer experience by removing the element of loan application denial from the conversation. Similarly, it helps salespeople avoid steering consumers to higher-priced choices that are difficult to fund. The shop-by-payment method can be a better way to close a transaction and create an environment of trust between the shopper, dealer and lender.
The power of lead preservation
A good prequalification process should preserve all leads —even those that are abandoned halfway through the application or shopping process. Applications that reside in the LOS should be available to lenders, even if the customer stops well in advance of submitting their loan application. The lender can use the information as a warm lead and offer it to another dealer who may have a vehicle that is better suited to the customer’s wants. This positions the lender as a referral source for dealers, elevating their profile as dealers distribute funding requests to the partners they know and trust.
Prequalification in today’s economy is essential to the success of automobile lenders and dealers, as well as to the happiness of consumers. The legacy method of pre-approving buyers by vehicle type is an outmoded model that far too often disintermediates the consumer-dealer relationship and drives the customer to find another source for funding.
This practice places enormous pressure on the dealer to find a lender to finance the purchase, on the lender for taking on a risk that may not pan out, and the customer who must meet payment obligations that may be beyond their budget.
Lenders that prequalify applicants by payment structure are more likely to see transactions close and keep both dealers and consumers happy. And by using applicant data intelligently through their LOS systems, lenders can strengthen their relationships with automobile dealers by becoming a source of much-wanted warm leads.
Bob Metodiev is head of business development at Inovatec Systems Corporation, which provides cloud-based loan origination and loan management solutions for automotive, power sports, equipment and other lenders.