I have been on the road quite a bit the past couple months. With all the advancements we have made in this segment, I’m still amazed to find otherwise prosperous dealers struggling to produce adequate back-end profit from their special finance departments.
I was in Omaha, Neb., right before Christmas, meeting with a group I have worked with for a long time. They have a tremendous F&I team. They were averaging between $1,600 and $1,800 back-end profit per vehicle — except on subprime deals, where they were averaging closer to $700 or $800. The staff said they were lucky to make any back-end profit in special finance.
They were wrong.
Folks, this is not rocket science. It all comes down to which vehicle you sell to the customer and what they put into the deal. We’re coming up on tax season. I don’t want you to continue making mistakes in inventory selection. Let’s correct them now.
PTI and LTV
The mistakes on which we need to focus have little to do with how much you owe on the vehicle related to book. The problem is that the price of each unit is eating up all the space in your payment-to-income (PTI) and loan-to-value (LTV) ratios. By selecting a vehicle that is $1,000 less expensive, you create the opportunity to upsell tons of back-end product.
I work with dealers of every stripe who routinely average $1,600 or more on the back end in SF, including deals with Tier 3 and Tier 4 finance companies. That is especially impressive when you consider that those companies tend to place strict limits on how much you can sell and how much you can make.
My advice is to back down the transaction price just a hair. Inflated transaction prices are the common denominator among struggling F&I departments. It’s a telltale sign, because those debts require a significantly higher monthly payment. By stepping down, you haven’t maximized the PTI, which is what the finance company is most concerned about.
This could prove particularly important in the near future. If the regulators have their way, finance reserve from banks and finance companies is going to go away. I’ve been saying this is likely to happen for the past nine months. Ally’s recent $98 million settlement with the CFPB was a major red flag. It’s essential that special finance managers learn how to get callbacks that give you enough room to sell products.
Let me be clear: This has nothing to do with the illegal practice of payment packing. I would never suggest you mark up the interest rate to cover unwanted products. Nor should you include the service contract or GAP in the price of the car. I just want you to give each customer an opportunity to secure their purchase.
The first step is to be sure the sales team — including the salesperson, the desk, whomever — doesn’t max out what the customer can afford.
It’s easier to sell a nicer, more expensive vehicle. It’s a problem endemic to the industry. You can’t blame the salesperson for trying to please the customer; in any case, that’s not the issue. The main problem is that most customers don’t understand how the price translates to their monthly payment.
There are umpteen versions of the Corolla, each of which will get your customers to work and their kids to school. Car buyers love the look of the Infiniti G35, but a Maxima will drive just as well and last just as long.
Given the opportunity, most subprime customers would prefer to buy a vehicle with a protection package, particularly the service contract. They know their budget is maxed out by the monthly payment. Every dealer knows that when the car stops working, the customer stops paying. Yes, you can repossess the vehicle, but the repo and reconditioning just add further costs.
The special finance sales process was designed to help customers make the right choice by pre-qualifying their purchase. That purchase should include a service contract and GAP coverage. Without them, your customer could wind up in a situation familiar to most credit-challenged drivers: An unexpected repair, theft or total loss leaves them with a vehicle they haven’t paid off, can’t afford to fix and can’t drive. A protection package will keep them on the road, protect their purchase and help them rebuild their credit.
One common misconception is that Tier 3 and Tier 4 finance companies just won’t let you sell any back-end products or will limit your income. Yet you’re still able to make $600 to $700 per vehicle through companies like Credit Acceptance and Westlake Financial. It really comes down to where they draw the line. What is the end result going to do to the monthly payment?
Even if you are limited in the upper tiers, that is a small percentage of your deals. On Tier 1 and Tier 2 deals, with a proper menu presentation, I see back ends of up to $2,500 all the time. If you think that sounds like a prime deal, you’re right. The same rules apply: If a prime customer qualifies for a $500 monthly payment, you do them a disservice if you show them a Mercedes that, no matter what, even with the best lease in the world, they can’t get into for less than $650 a month.
So if your next subprime customer’s income qualifies them for a $400 monthly payment, the salesperson should show them a vehicle that will line up in the $325–$350 range. From there, just as in prime, it’s just a matter of a good, solid turn to F&I. If the F&I manager does a great job with the menu presentation and the customer wants the products, the callback will cover the payment.
Be it prime or subprime, as long as you’re not overselling the vehicle, you will have the opportunity to do what you need to do. Car buyers know they will be limited by what the bank says they’re qualified for. By and large, they are looking for the smart choice. You’re impairing customer satisfaction if you sell them something they can’t afford. Build the value in protection the same way you would in prime.
End of the Month
I am fully aware of the pressure to move vehicles on the eve of their 30-, 60- or 90-day turn. For some dealers, it’s an ongoing issue. The solution? Don’t wait until the end of the month. You should be trying to move that distressed piece of merchandise all month long. Match the car to the customer and the customer’s budget.
If the customer is looking for a full-size vehicle, show them the one you have had the longest or has the most gross profit built in. Either way, you’re happy; the old one had to go away regardless. But if you follow the same process consistently, you won’t wind up in those end-of-the-month panics.
Will there be times when you have a unit you need to go away? Yes. Will there be customers who will say they want the G35 or nothing at all? Sure. But for the dealers I know who are making those significant profits in F&I, those are excuses rather than reasons. The time for excuses is over.
Until next month, great selling!
Selling The Service Contract
Vehicle service contracts are for people who want to cover the car the whole time they have it. It’s not an exclusive club. Your customers don’t have to have high income or good credit to join.
What they do need is a dealer who is willing to step down to a less expensive vehicle in order to include a protection package. Giving your F&I team the opportunity to sell a service contract — and GAP coverage — will be of great benefit to you, your customers and your finance company partners.
My contacts at the banks and finance companies that serve lower credit tiers seem to agree that these contracts stay on their books for an average of about two years and three months. Adding the service contract increases the time the customer holds the vehicle before they trade it in. Following the process outlined in this article will make your deals stand out.
Finance companies know just as well as you do that, if the car breaks down and the customer can’t afford to fix it, the loan has a good chance of going sour. Part of that responsibility falls on the finance company, and they wouldn’t finance the protection package if they didn’t see the benefit. Those that specialize in Tier 3 and Tier 4 contracts certainly encourage it.
If your sales team is just stuffing people into cars and maxing out the payment-to-income and loan-to-value ratios, your portfolio will not perform. Service contracts help keep people in their cars and their loans on the books.
Greg Goebel is the CEO of Used Car University and the industry’s leading special finance trainer since 1989. He is an 18-year former dealer principal and a highly sought-after speaker, author and consultant.