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Keep Lenders from Steering Away Profits

April 2009, F&I and Showroom - Feature

by John Sauers

What is the difference between three and five? If you are an automotive dealer, the answer to that seemingly simple question might be plundering your bottom line.

As dealers and their customers struggle through a tight credit market, lenders are changing their financing practices. Rather than approving a loan amount for line three of the installment contract, lenders are setting the loan’s value for line five. As a result, the approved loan amount often cannot be stretched to include F&I products. So what’s a dealership to do? With a little homework and some good old-fashioned relationship development, auto dealers can once again regain their line-four profits.

Step 1: Focusing on Line Five

Line four of the installment contract can cover a wide range of products: vehicle service contracts, gap insurance, credit life insurance, credit disability insurance and more. When a lender approves an installment contract based on line five, it leaves the dealer with few options to sell these complementary products. When that occurs, the dealership could convince the buyer to put money down for the insurance or vehicle service contract, which would be a tall order given the current economic environment.

Another option is reducing the selling price of the vehicle or increasing the value of the trade-in. Neither of those options are attractive, because both further drive down profits during a time of already razor-thin margins.

There is a better way to realize additional profits. It involves dealers working to get line-three approvals. Achieving that, however, will require a little research and some relationship building.

Step 2: Know the Insurer Backing the Product

The best way to sell a product is to believe in it, which is why the line-four products your dealership carriers should be thoroughly researched to ensure they are provided by high-quality firms.

For example, when researching a company offering insurance, determine whether it is a traditional insurance company or a risk retention group (RRG). A traditional insurance company must comply with each state’s department of insurance. In contrast, a RRG is a federally-chartered company that is not required to be under the jurisdiction of a state’s department of insurance. There are several examples of why this distinction needs to be made.

In 2003, a large RRG went bankrupt, leaving millions of consumers holding worthless service contracts. As a result of this and similar situations involving other RRGs, lenders are much more trusting of traditional insurance companies. Just make sure you know the insurance company’s A.M. Best Rating, and make sure you’re familiar with the company’s history in the industry.



  1. 1. Dwayne Jennett [ May 05, 2009 @ 02:10PM ]

    Dear John, being a consultant to dealerships who rely on the profits generated in F&I, I was very interested in reading your article. With retail automotive sales being severely curtailed, F&I and Service profitability is more important than at any other time in our industry. As I read step 2, I was a little concerned by your RRG commentary, as I found an error in your discription of what jurisdiction RRG's fall under. In some states, you're correct, but in others an RRG can actually come under more scrutiny than an insurance company. I know this because I represent a product that is insured by a Virginia based RRG. In their state, not only is their "insurance" company's books open to inspectors monthly, but the admin company as well (where all of the money disappeared with the offshore based RRGs like the one you mentioned in your article). These days, the only advantage to creating an RRG versus an insurance company is the initial capitalization needed. Most of the same rules and safeguards apply to RRGs as they would with a traditional insurance company. So, as well as knowing their A.M. Best Rating, I believe it is important to know which state the company is incorporated in. If regulators have access to the books, there's generally nothing to worry about.


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