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Dealer Financing Overview

Financing Motor Vehicles

One thing I have found out in this business is that it is very rare when a customer pays cash for a vehicle. Customers will usually need a loan for the vehicle they are purchasing. Most of your customers will ask to assist them in obtaining some type of financing. Helping your customers obtain financing can be a very big part of your business that will lead to a much higher sales volume. There are basically two types of financing your can offer your customers.

On the Spot Financing

The first type of financing is sometimes called “On the Spot Financing”. On the spot financing is the term used when your customer gains financing on the spot at your dealership. On the spot financing will consist of you establishing a relationship with a local bank or some type of dealer internet lending company. Your lender should provide you with some standard loan application documents that you will have your customer complete in person or online, then fax or send the documents to the lender electronically. Your bank will then email or fax an approval of the loan “On the Spot’. Upon approval, the lending institution will deposit the approved funds directly into your bank account. The customer will take possession of the vehicle and make payments directly to the lender.

Buy Here Pay Here

I am sure you have seen several vehicle dealers with signs that say “Buy Here Pay Here” or “Financing Guaranteed”. These lots are often called “Buy Here Pay Here” lots. These type of dealer operations can offer huge financial rewards but I would never recommend starting out as a “Buy Here Pay Here” because there can be a certain amount of financial risk involved. I would highly recommend using a bank to finance your customer’s vehicles your first year or two in business.

As a “Buy Here Pay Here” dealer you can buy your vehicle at an auction then sell it to a customer with bad credit that is unable to obtain bank financing. If you ask for a twenty percent down payment, your customer will have to give you a down payment, then make payments to your dealership every month, or every other week until the balance is paid.
Sometimes the customer will put the down payment on a credit card, then mail or bring the payments to your dealership. Your customers may also allow you to deduct their bi-weekly payments directly from their checking accounts which can be very convenient. Most dealers finance the cars for 2 years but some dealers will allow a customer to pay up to 5 years. Most customers that purchase from a buy here pay here dealer have bad credit and cannot get a loan from a bank.

Offering your own financing is a great service that you can provide for people with bad credit in desperate need of a vehicle. Your customers are just hard working people who just happen to have bad credit. Buy here pay here financing is a great service to this clientele and can actually lead to them obtaining higher credit scores after they have paid off the vehicle.


A lien is a financial claim on a vehicle.

What do you do if you are financing a vehicle and the customer gives you a one thousand dollar down payment but still owes you five thousand dollars? You must file a lien on the vehicle. If you are offering buy here pay here financing you will need to know how to file a lien on the vehicles you sell. This ensures that your customer must pay the amount owed before they can sell the vehicle. If a vehicle has an unpaid lien, it cannot be sold to another party. The lien you file on the vehicle is your financial claim on the vehicle that will require your customer to pay you all the money that is owed on the vehicle before reselling the vehicle.

How do you file a lien? Most states allow anyone with a dealer license in that state to file liens electronically or by phone. Most states charge dealers a small fee, such as $2.50, to file a lien on a vehicle. Your state should have the proper “Dealer/Lienholder” application you will be required to complete before you are allowed to file a lien on a vehicle. Many states will automatically deduct the lien filing fee from your checking account allowing them to obtain payment instantaneously so they do have to waste time sending out invoices.

Your state lien filing system will be very secure. Only a few business groups are allowed access to lien information, such as attorneys, towing companies, and licensed motor vehicle dealers. Many states require you to fill out a form, sometimes called a “Request for Security Access Code Number”. This form will give you a security access code number that you will use each time you file or look up a lien. After you input your security access code number, you should gain access to the lien system. You will be instantly billed for the amount due to your state. Most state lien systems also contain step by step instructions on their website that will walk you through the lien filing system.

Lien Lookups

Another way you can use your states lien database is to do a “Lien Lookup”. Not only can you file a lien on the vehicles you sell, but you should be able to look up the lien information or title history on a vehicle you are interested in purchasing.

If you every plan on purchasing a vehicle from someone that has lost the title, you must look up the lien information to make sure the person trying to sell you the vehicle is the rightful owner. They do not have the title in hand to show you they are the owner with legal selling rights to the vehicle. You also need to make sure the person selling the vehicle does not owe several thousand dollars on the vehicle and that they did not steal it. Normally you can get this information directly off the title, but if the title is lost, you will have to do a lien lookup.

Be sure to contact your state dealer license bureau to obtain the necessary lien filing and lien look up forms. Your state dealer license bureau should be able to walk you through the lien filing system.

Vehicle Repossessions

Buy here pay here financing can be a very profitable process but it also has its downside. Sometimes you will be required to repossess a vehicle that you sold due to non payment. Unfortunately, if your customer is not able to make the payments on the vehicle that you sold them you will need to do a repossession, or vehicle recovery. Many states allow a dealer to do their own vehicle recoveries, be sure to check with your state dealer license bureau to find out if you are allowed to do your own vehicle recoveries. You may also choose to use a professional vehicle recovery company.

When you are researching vehicle recovery companies, be sure to work with an ethicalcompany that can provide several references. Many recovery companies may state something like “I will have this vehicle back at three o’clock in the morning and the
customer will not even know that it is gone”. This is the old school recovery company. Stay away from old school recovery companies. Be sure to establish a business relationship with an ethical recovery company that will knock on the customer’s door and inform them of the recovery so they will be able to remove their personal possessions from the vehicle. Having a vehicle repossessed can be very traumatic for your customers so you should make sure the recovery is as easy and painless as possible.

After you have recovered the vehicle, you should usually store it a location other than your dealership. Most professional recovery companies have their own storage lot for the vehicle, but you should be aware that most recover companies charge a daily fee to store your recoveries.

Repossessed Title Applications

If your customer is not able to catch up the vehicle payments, you will be required to apply for a new title so you can re-sell the vehicle. This is sometimes called a “Repossessed Title Application”. Before you apply for a new title, most states require you to give at least ten days written notice before applying for a new title. Most states require a registered letter the shows proof that the customer received the notification. This allows your customer every opportunity to catch their past payments up so they can take back the vehicle. Once you have contacted the customer in writing, you will need to apply for a new title so you can re-sell the vehicle.

Your state dealer license bureau should be able to give you information regarding how to apply for a new title. The price for a new title is normally twelve to fifteen dollars. After you order a new title you should receive it in the mail in about 7 days. When you receive a new title you will be able to re-sell the vehicle at full retail value. Be sure to check with your state dealer license bureau to find out what type of notice requirements are in effect before applying for a new title.

I once spoke to a dealer that sold the same three quarter ton truck seventeen times! He made it clear to me however, if given a choice, he would of rather had the first customer pay off the vehicle the first time it was sold.

If a customer pays a vehicle off, be sure to release the lien in a timely fashion. Most states require dealers to release a lien within five business days or face substantial fines. If your customer has met the requirements of the deal by paying off the vehicle, be sure to meet your requirements. Release the lien in as soon as possible, so the customer can sell or re-title the vehicle.

Also be sure to check your state’s laws regarding how much interest you can charge your customers. Some states allow up to 26 percent interest while other states strictly forbid buy here pay here dealers from charging interest. Be sure to find out the maximum amount your state allows, if it does allow interest to be charged, and never charge above the legally allowed amount.

Be sure to consult with an attorney before offering any type of motor vehicle financing.

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Delus Johnson-Lead Instructor
Automobile Dealer Training Association