Consumers have a lot on their minds these days with the housing woes, credit concerns and rising gas prices. The biggest question floating out there is whether the subprime crisis has peaked or not. This uncertainty will obviously present some major challenges for the industry, but as Nobel Prize winning scientist Ilya Prigogine once said, “The future is uncertain, but this uncertainty is at the heart of human creativity.”

We in the car industry have certainly experienced our share of challenges over the last few years. The good thing is now we’re seeing major automotive manufacturers solving these problems from the past, with many well on their way to recovery. So, how has this change impacted the F&I department?

During those years when sales reached record levels, the industry went through a period of self regulation. Yes, government regulators played a role in pushing compliance to the forefront, but it was the industry that led the way. There was the Car Buyer’s Bill of Rights that emerged in California, and menu systems became a must-have tool to legally protect dealerships. As you can see, the period fostered a more professional F&I department.

Now, as we face these new challenges, the question becomes: How can we sell more vehicles so we can take advantage of what we learned?

The Year of the Used Car?

In the June 2007 issue of F&I Management & Technology, Melinda Zabritski, an analyst for Experian, made a bold prediction in an article about the pressure being felt by F&I departments to do everything in their power to get a deal bought. “There is a lot of speculation that 2008 is going to be the year of the used car,” she said. “I think dealers need to be more responsive to what’s happening in the used-car market. They also need to think about stocking the right cars … that’s going to be huge.”

If her prediction is true, the question you need to ask yourself is: How do you plan on taking advantage of this surge of pre-owned vehicles, especially in the F&I office? Before answering that question, you first need to take a look at what you know. Second, you need to know what products are most compatible with used-vehicle purchases.

So what do we know?

According to a Consumer Bankers Association study, 48 percent of used vehicles sold in 2006 were for loan terms longer than 60 months, a 40-percent increase from the previous year. The Power Information Network also told us in its 2007 study of the subprime auto market that more than a third of customers who finance or lease used vehicles through franchise dealers have credit problems (i.e., their credit scores were below 650).

Experian has also said that the credit distribution for used-vehicle sales in July 2007 was 48.49 percent prime, 27.10 percent nonprime, 18.03 percent subprime and 6.38 percent below subprime.

We can safely gather from this information that products which fit well with longer loan terms will be good choices for the consumer. We should also assume that the credit-challenged customer will highly affect our income.


The Ideal Product Mix

There are a few factors that go into deciding which products should be highlighted on your menu for used vehicles. I’m talking about which products appear most in the packages and are closest to the top of the package option. The most important factor is which products you believe in the most. Persuading a customer to purchase a product starts with you believing in it yourself. Sales are the transfer of enthusiasm from the seller to the buyer. So you must have complete belief in the value of what you are offering if you are going to be effective at selling it.

The products that provide the most benefit to the customer are another key factor for which products should be given the most emphasis. As was stated earlier, since the loan terms customers are taking are increasing, products that fit well with longer terms are good choices. Another factor is if the product is a soft add. That is, can it be added to the customer’s loan without pre-approval? Finally, products that cost less can be easier to sell to payment-conscious customers.

Here is my list of products that should appear most frequently and prominently on the menu, starting with the best:

1. Vehicle Service Contract: This was the easiest choice on the list. Service contracts are a tremendous benefit to the customer and the dealership. Best of all, customer satisfaction is typically higher when a customer purchases a service contract. In the event that he or she has a breakdown, an otherwise unhappy customer sees it just as an inconvenience. The dealership also benefits through customer loyalty, repeat business and income. Other than the car itself, you won’t find another product that pays more income to the dealership than the service contract.

Now, when I make this recommendation, I’m assuming the contract is underwritten by a company that has set aside the necessary reserves to pay its claims. The last couple of years we have seen a few VSC companies fail to fulfill their commitments. These situations have resulted in unhappy customers, and, in some cases, dealers absorbing the loss of income to pay the claims. Should a dealer have seen it coming? I’ll answer this by saying, “If a service contract is much cheaper than the competition, the VSC company is easy to pay claims, and you’re not able to evaluate the insurance company’s financial position, then the possibility of insolvency is high.”


2. Guaranteed Automobile Protection: GAP makes the list at No. 2 because of its benefit to the customer, low cost per month, customers choosing longer terms for their auto loans, and high acceptance from lending companies.

Because of soaring repair costs from high-tech safety features, more vehicles today are being totaled than being repaired. Bottom line: It’s simply getting easier to total a vehicle than repair it. A side effect of today’s sophisticated vehicle designs is they are too expensive to fix even after minor collisions.

The price of GAP per month to a customer is around $10, and most of the time less. This makes it a very easy product for the customer to accept. Lenders are very receptive to GAP. Even secondary finance companies, which are prone to limiting a customer’s product choices by restricting advances, tend to give the dealer the room necessary to add a product like GAP.

3. Disability Insurance: Especially with today’s credit concerns, this is the one product that provides excellent means of protecting a consumer’s credit in the event they can’t work due to an injury or illness.

Ironically, most nonprime and subprime lenders are less likely to allow customers to add credit disability to their loans. They do this despite this customer segment being the most likely to need this product. Historically, losses to insurance companies are higher for credit-challenged customers than for prime customers. Additionally, these customers are more likely to have tighter budgets and won’t have the cash flow to make their payments if they are disabled.

4. Tire and Wheel Coverage: This is the first line-one add product that makes my list of products primed for that used-car customer. This is also a product that must be added to the sale price. The typical dealer cost for this product is about $100, so the product can be purchased for about $5 a month.

The cost of replacement for tires and wheels today can run from $300 to $500 per wheel. So it often takes only one claim for a customer to get back his or her money. Since most policies have unlimited occurrences for up to five years, it is easy for a customer to see $5 per month as a value to him or her.

The challenge with this product is that most lenders won’t allow tire and wheel coverage to be included as a soft add on a customer’s loan, which means the customer might have to come up with cash to pay for the product. One has to wonder when lenders are going to be more flexible about adding some of these mainstream, high-value products without prior approval.

5. Credit Life Insurance: Is it time to once again begin emphasizing the oldest F&I product? This product has taken many shots over the years, but still maintains its position as the longest-surviving product in the F&I office. We have seen three major providers of this product exit the market in the last two years. However, I’ll let them answer why they made that decision.

Credit life insurance is a group policy that has everyone pay the same rate, regardless of age (as long as they are within the policy age limits), sex or health history. Many people can purchase credit insurance for a more affordable price than any other form of life insurance.

Credit life insurance is also allowed as a soft add by most lenders, which makes it easy to add to a customer’s loan. The cost of the product is regulated by your state insurance commission, and can usually be added for about $8 to $15 per month. This makes it manageable for a customer to include in his or her monthly payment.

6. Maintenance Package: The key to making this an attractive product is keeping the cost in line with what the customer would pay for each individual service. If the retail price — including the F&I profit — exceeds what the customer would pay per visit, good luck making that sale. In most cases the cost per service visit is reduced to attract more customers to your service department. That difference can justify the markup for F&I profit. Some companies include other benefits, such as dent-and-ding or tire-and-wheel protection, to enhance the maintenance package in order to justify the cost.

7. Other Products to Consider: I know there were many products left off my list. I selected the products I have the most enthusiasm for, that provide the most benefit to the consumer and are reasonably priced. I also weighed heavily the products that can be added without lender approval.

There are indeed other variables that you should take into account in making your choice, such as the products that sell best in your state or products that work well with your customers. We can’t be certain that a product mix will always work for every used-car purchaser, but this uncertainty is at the heart of human creativity.

Ron Martin is the president of Vision of F&I. You can reach him at [email protected] or by calling (260) 338-0670.

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