Loan Market Direct (“LMD”) is in the auto finance business. We are car guys and data freaks. We make money.
But making money in any finance business today doesn’t seem so easy. Ask Lehman, Goldman, AIG, Citi, etc. (way too long of a list of smarty pants companies lately). So you wonder, if big impressive companies are struggling with finance in general how come Loan Market Direct is not?
The answer is simple. Indirect lending.
Simple answer; difficult process.
If the operations of indirect lending were simple more capital bleeding companies would not be in the Washington bread line.
All right, so what is Indirect Lending? Indirect lending is where a lender buys debt. LMD buys car loans from auto dealers and finance companies. You know when you go to buy a car, the dealer always offers financing … it’s really from guys like us. The dealer arranges the financing according to guidelines that he knows will be acceptable to some indirect lender. The person at the dealership who arranges this is called the F&I guy (Finance and Insurance). You hardly ever get to see the F&I guy, he’s the one that the sales guy keeps leaving the room to pitch your offer(s) to, time and time again. To keep this simple the F&I guy is just trying to place your “note” with the “bank” that will give him the highest “advance”. Huh? It’s really called Hanging Paper and really means that he is trying to get as much money as possible for the sale of your note. Even “A” credit paper gets sold with fees. Lesser credits known as B and C, non-prime, sub-prime get sold with fees and a discount. Huh, again? O.K., here’s a simple example:
You buy a car for $12 k, put $2k down and finance $10k. Indirect lenders will bid on your note depending on the quality of the deal, your credit and the value of the car relative to the amount financed. If you have good credit and are buying a new Ford, Ford Motor Credit might pay pretty close to par or $10k for the note. If you have terrible credit, buying a used car, an indirect lender will bid at a discount of maybe only pay $8 or $9k for the deal.
LMD buys loans based on overall credit and collateral quality. We pay, or offer to pay, the “right” price based on Risk Based Pricing. This is our little niche. It will take me a year or two more of blogging to explain the details but I’m planning on it. Here’s the summary for now.
We know math, especially algebra. We know how much money we need or want to make, our return. We know all the terms of a note like rate, term and amount financed. We know, within reason, the other variables in the life of the loan that will affect return (we also paid attention in statistics). We make a little formula, plug in all the variables and solve for the PROPER price to pay.
That’s the simple part. I’m going to dive into the difficult part soon, the process, aka operations.
So you still want to know why the big fancy “in the process of getting bailed out” companies are in the spot they're in. They obviously didn’t pay attention in math class.
Come on back soon to read some of my next articles including:
“Too Big to Fail ... How About: Too dumb to Survive”
“What were they Thinking Buying all that Crap”
“Collapse from the Weight of Greed”