They say a journey of a thousand miles begins with a single step. When it comes to the remarkable journey your Carvana vehicle takes from the moment it is acquired by us, to the moment it is delivered to your door, the points that plot its incredible course are both numerous and meticulously executed. At Carvana, transparency lies at the heart of everything we do, and we believe you deserve an up close and personal view of the important steps that lead to the completion of a Carvana purchase.
Our multi-part series called “The Carvana Odyssey” serves to reveal just how much energy, effort, and passion goes in to providing you with your Carvana purchase by offering an in-depth and behind-the-scenes look at the processes and people that make the new way to buy a car possible. The Carvana Odyssey continues with us taking a closer look at Carvana’s financing model and how it serves to provide completely personalized financing terms to Carvana customers. To help bring clarity to this truly unique Carvana differentiator, we spoke with Matt, Carvana’s associate director of financing and an individual intimately familiar with the world of automotive financing.
PART V: FINANCING MADE EASY
One of the more confusing and offputting aspects of purchasing a vehicle is the process of financing a vehicle. Unless you’ve saved up enough money to pay for the vehicle you want upfront, you’re likely to be among the millions of Americans that choose to finance their vehicle purchase over a span of multiple years. And while on the surface the idea of slowly paying off your vehicle seems like a reasonable and easy enough process to digest, beneath it in lies a way of doing business that, traditionally speaking, has been wrought with questionable negotiating tactics that at best work in favor of dealers, and at worst borders on unabashed discrimination towards customers.
Generally speaking, a trip to your average car dealership to purchase vehicle will ultimately include a visit to the “back room” to fill out a credit application and discuss financing details with the dealership’s finance manager. Once complete, that credit application is then sent out to a wide array of lenders who process the application and pull credit data on you. Afterwards, the finance companies come back to the dealer with various offers for you, the customer. Once the offers are in hand, the dealer basically has two options:
- Give the customer an interest rate and have them accept the offer.
- Give the customer an interest rate that is adjusted, enabling the dealer to earn a bonus check of sorts for getting the customer to pay a higher rate.
According to Matt, this practice is what gives rise to the aforementioned questionable negotiating tactics.
“It’s up to the finance manager to decide whether they feel like they’re able to squeeze the customer for more money,” says Matt. “It really opens the door to rampant price discrimination. And it’s not necessarily related to racial or gender discrimination, but the dealer can kind of try and read you and determine whether they think a customer is price sensitive, or if they can throw any offer at them and they’ll take it.
“That’s a vast difference from the way we do financing here.”
THE CARVANA APPROACH
At Carvana, the approach to customer financing is one where efforts are made and systems are put in place to reduce, if not completely eliminate, incidents where price discrimination could come into play. To receive financing terms from Carvana, minimal information is required, making the process simple for the customer while still enabling Carvana to go to the credit bureaus and retrieve credit information about the customer.
“Instead of just looking at FICO, we’re really going beyond that to get their whole credit history and incorporate as much information as we can,” says Matt. “We then come back to the customer with an interest rate and down payment that we are agreeing to extend to the customer without playing that ‘back room’ game with them.
“It’s so much more fair and transparent. We don’t have the same culture or way of doing things when compared to more traditional dealerships. And, quite frankly, we also have less ability to discriminate. Since we’re online, we’re not looking at anyone or sitting there with them trying to decide if they’re desperate and will jump at anything.”
Another key difference between Carvana and the traditional dealership when it comes to playing fair with financing is the fact that customers are able to get their Carvana terms without having their credit impacted.
“While that is becoming increasingly common with other dealers and finance companies where they’ll kind of allow you to see what your terms are without a hit to your credit score, it’s still a fairly unique thing and we’re still kind of at the cutting edge of that,” says Matt.
FINANCING OPTIONS ABOUND
In addition to attempts to bring more fairness and honesty to the fold when it comes to financing, Carvana has also worked hard to provide customers with not only a comprehensive understanding of their financing terms, but also full visibility with regard to how their terms are applied to vehicles in Carvana’s online inventory. When a customer receives financing terms with Carvana, they are able to see those terms applied to every vehicle on the website.
“You see literally 10,000 different choices you could make regarding how much you want to put down and how long you want the term to be and how big you want the monthly payment to be,” says Matt.
“That’s something you just don’t get when you’re looking at another website or another in-person dealership. They’re just going to come back and say, ‘We really like giving the customer choices! Here’s your three choices.’ There’s very little wiggle room for customers by opting to go the traditional route.”
Furthermore, Carvana doesn’t have a hard policy that prevents them from lending to individuals with less than ideal credit, which is very different from how most lenders operate.
“Our solution to that is to try to put all customers on a continuous gradient,” says Matt. “The philosophy is, there is always some deal we would be willing to make. If we perceive a customer as being fairly risky to lend to, that doesn’t mean we’re going to run away. That just means we’re going to try and find a way to offset that risk. The way we offset that risk is by maybe asking the customer to put a little more skin in the game and put a little bit more money down.”
The digital manifestation of that continuous gradient is the creation of Carvana’s financing dials, which offers customers the ability to easily see and personalize their financing terms to fit their lives. Changing your figures for your desired down payment, APR, and monthly payment has ripple effect on what you can expect to ultimately pay for a vehicle, and the dials serve to help customers better understand the impact of their financing decisions.
“We created the dials in order to allow the customer to see the benefit of putting additional money down,” says Matt. “So not only when you put more money down does your loan obviously get smaller and your payments go down because of that, but we also reward the customer with a lower interest rate. It’s a very academic/theoretical approach that helps put financing into a context that makes it less abstract and easier for customers to understand.
“With us, we’ve eliminated a lot the confusion surrounding financing by letting the customer determine their own financing terms based on the original information they provided to us. Obviously I’m biased, but I think the tools we have are so far beyond what you would see at any other finance company or dealership.”