As Net Profits Fall - Dealers Turn To Lending. It's Time to Rethink Subprime

If the last few years have taught Dealers anything, it's that the ground beneath their feet can shift quickly. As the attached benchmark data illustrates, New and Used vehicle sales have been on a downward trend in net profit contribution—all while overhead expenses continue to rise. In many cases, Parts and Service have helped offset some of these losses, accounting for an increasingly critical share of total net income. However, there's one glaring opportunity missing from most dealership income statements: the ability to control lending and capture subprime financing profits without a major capital outlay, concerns with compliance, or significant changes to existing sales processes.

The Growing Profit Gap

National Automobile Dealers Association (NADA) and Cox Automotive Inc. data shows that while per-vehicle margins on new and used cars surged temporarily during inventory shortages, they've begun to normalize—and in some cases, drop below pre-pandemic levels. Meanwhile:

• New Car Sales: Experiencing margin compression due to increased supply, rising interest rates, and heightened OEM constraints.
• Used Car Sales: Used car prices and volumes have been volatile. Cox Automotive Inc. Automotive data shows used retail sales volume tracking double-digit percentage points lower year over year.
• Fixed Operations (Parts & Service): This segment remains the most consistent profit contributor, often padding the bottom line even when sales departments face headwinds.

This benchmark from an anonymous 20 Group covering 2021 to 2024 underscores a scenario many dealers recognize: new and used vehicle departments once accounted for the lion's share of storewide profits but are now yielding diminishing returns. Fixed ops has become the hero, increasing its contribution to total net income. And yet, one potent profit center remains conspicuously missing.

The Missing Department: Lending

Lending within the dealership structure often presents untapped potential for net profit, especially in subprime segments. Lease Here, Pay Here (LHPH) and store-level lending platforms like @Dca allow dealerships to recapture profit they would otherwise hand to outside finance institutions.

Why Now is the Time to Rethink Lending

1. Higher Margins: Dealers can earn interest income, origination fees, and finance-related revenues, including lucrative product sales, by underwriting leases using the LHPH lending framework.
2. Low Barriers to Entry: Launching a Dealer-Owned Leasing Company does not mean becoming a bank. AI-driven lending platforms like @DCS and the LHPH lending framework governed by Reg Z have opened the door for franchise and independent dealers to deploy bank-level technology at a store level and participate in finance profits without disrupting existing processes, tremendous capital outlay, or extensive licensing and certifications.
3. Enhanced Customer Retention: Dealers offering LHPH also control the customer and vehicle. This means deeper customer relationships, with retention rates near 60%, and shortening trade cycles to 36 and sometimes even 24 months.

Subprime: Is Growing Exponentially

According to the Federal Reserve, roughly 20% of auto loans in the United States are subprime. These consumers, often overlooked by traditional finance channels, still need reliable transportation. When dealers step up to fill that gap—especially with the help of advanced AI underwriting—they open a sustainable, recurring revenue stream.

In fact, Cars Commerce data indicates that subprime loan originations remained relatively stable—even through economic slowdowns—because transportation is a near necessity. This means dealers with an in-house or lending solution can better weather industry downturns, capturing a segment of the market that other lenders might dismiss.

LHPH: An Emerging Favorite: Even for Franchise Dealers

Lease Here, Pay Here (LHPH) models are becoming especially popular due to their flexibility and reduced regulatory burdens compared to Buy Here, Pay Here (BHPH). LHPH can provide:

• Shorter lease terms help customers build equity fast and reduce default rates.
• Better vehicle retention and easier repossession processes for dealers. 60% of consumers return to the store for service and to repurchase
• Steady monthly income from lease payments is an excellent source of liquidity, and end-of-term vehicle returns for resale create an inventory feedback loop.

AI-The Equalizer

At DCS, we're introducing AutoLend IQ at NADA, which leverages machine learning and predictive analytics to generate real-time risk profiles, allowing dealerships to accurately and quickly approve subprime leases. Our platform will:

• Reduces default rates by identifying hidden risk indicators in customer data.
• Expedites approvals (sometimes in seconds), increasing throughput for your F&I office while systematically integrating into your sales process.
• Lowers operational costs by automating many back-end funding processes and requiring no additional personnel.

With DCS Dealer Controlled Solutions powered by AutoLend IQ, even smaller dealerships can adopt in-store lending, gaining a strategic edge without massive overhead or staffing expansions.

Our Situation

Dealers are making less from vehicle sales even as expenses—inventory, facilities, staffing—climb. Meanwhile, Parts & Service continues its vital role, keeping the dealership's lights on when showroom margins shrink. But for those ready to take control of another profit center—lending—the upside is significant:

• Exponential Returns even in downcycles.
• No massive capital outlay or floorplan expansion is needed.
• No radical overhaul to your existing sales processes or people.

Now is the time to turn that missing profit center into a core revenue generator that grows exponentially year after year.?