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The Right Mix

A manager for a New York-based dealer group explains why the right lender mix is becoming an increasingly blurred variable for dealerships and their F&I offices.

August 2015, F&I and Showroom - Feature

by Ryan Fischer

As finance managers, it can be easy to view lenders as nothing more than a tool to complete our jobs — not much different from the stapler that sits on our desk. What was once a process of faxing, calling and building relationships has turned into a click-and-wait transaction. And the advent of finance aggregators such as Dealertrack and RouteOne has widened this gap.

To make matters worse, the auto-approval systems many finance sources now employ have all but removed interactions between analysts and F&I managers who primarily work with prime customers. So, while technology has helped us in many ways, it has also made the relationship between dealerships and finance sources seem almost trivial. But it’s vital for us to remember that those relationships are as paramount today as they ever were, even if we don’t treat them as such.

With Dealertrack now connecting dealerships to more than 1,500 lenders, the right lender mix is becoming an increasingly blurred variable. Some dealers feel a larger array of lenders results in more opportunities to get customers financed, but at what cost?

Take a store selling 100 units per month. Let’s say 45% of the store’s deals are directed toward its captive finance source, while 10% are cash transactions. That leaves 45 vehicles to spread among the dealership’s noncaptive finance sources. Keep in mind that Dealertrack reported at the close of 2014 that dealers on its network had, on average, 10 noncaptive finance sources from which to choose. So in the case of our 100-unit store, that would mean an average of only 4.5 vehicles per lender — not enough to build any lasting relationships.

Lenders are inherently in the business of numbers and efficiency. Put simply, they’re willing to bend when given more deals. Capital One is one such source. It tiers its programs and allows greater flexibility based on the amount of deals you direct its way. At 10 contracts per month, your dealership is at the lowest tiered threshold, which Capital One refers to as a Diamond dealer. At 15 contracts per month, you become a Premier dealer. And at 30 contracts a month, you are an Executive dealer. Reaching the higher levels results in perks such as direct contact with dedicated buyers, who have the authority to make exceptions when appropriate.

But Capital One is just one example. For many lenders, a greater flux of deals directed their way results in a greater chance of getting a deal bought when you need help with an especially difficult customer. So rather than asking if your store needs more lenders, you should be questioning whether the store’s lender mix should be limited in order to create a better relationship with key banks.

A common fear for finance managers is not having the right bank for the right customer. This fear leads dealers to keep lenders in their portfolio they rarely use, simply for the rare scenario where a customer may fit only one program with one bank. But keep in mind, when you do a lot of business with a lender, they are often willing to accommodate your specialty customers. This give and take is what helps your relationship grow.

Ultimately, the right mix and size of your lender portfolio will come down to your dealership’s business model. A franchised dealership with the majority of its deals going to captive sources may want to focus on building and establishing long-lasting relationships with only a few key lenders. Other dealerships may sell to more subprime customers that require the assistance of noncaptive banks. Those dealerships may want to include more finance sources, but they also need to keep in mind that they should limit their mix in order to cultivate and grow a more personalized relationship with each lender.

When it comes down to it, we as finance managers have a great responsibility in choosing the lenders with which we contract our deals. It’s not always an easy decision. It may come down to taking less gross today for the opportunity to build a relationship with our key lenders tomorrow. We must evaluate our departments and choose wisely which course is best for us in the long haul, not just for the fleeting moment. Remember, be the leader you want to see, take control of what you can and build relationships with the people who will help you be successful for the long term.

Ryan Fisher is the store manager Rochester, N.Y.-based Dorschel Automotive Group. Email him at ryan.fisher@bobit.com.

Comment

  1. 1. William V. Fowler [ August 12, 2015 @ 06:46AM ]

    I find this article running contrary to the Issues the CFPB is raising concerning auto loan origination. Personally I believe the more financing sources a dealer has covering the full range of their customers risk market, the better it is for the dealer. Should you keep it within reason, most likely. But the real issue here is not the number of lenders, rather it should be addressing the lender selection process by the dealer. Please go to the article I posted in: https://www.linkedin.com/grp/post/2542813-6036859823147012099?trk=groups-post-b-title

  2. 2. Ryan Fischer [ August 12, 2015 @ 02:42PM ]

    William, you simply can't have a lender for every scenario or customer. You would need an unlimited amount of lending sources! However, what you can do is establish great relationships with the lenders you do have, especially your key banks. That is what the heart of this article was leaning towards.

 

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