In theory, the biweekly finance option — a concept made feasible by technology — provides a convenient and dollar-saving benefit to the car buyer, but it is not a cure-all. It yields excellent benefits in some situations, moderate advantages in others, and no appreciable benefit in still other scenarios. A F&I practitioner who doesn’t know when and how these benefits manifest themselves may inadvertently make misleading statements in pitching the product — statements that can’t be substantiated if challenged in court.
The first step in mastering any product is to get a clear picture of what it is you’re actually selling. To start with, you need to know if you’re pitching a bona fide biweekly payment plan (See sidebar on page 18). Most of the biweekly products dealers are pitching these days are essentially a bill-paying service restricted to withdrawing car-payment money from a customer’s checking account twice a month.
If the service is capable of making payments electronically, the funds collected may be transferred biweekly, with a few lenders making multiple monthly postings to the customers’ accounts. However, the majority of the payments are paid monthly on the agreed-to dates and for the full amounts as recorded on the installment sale agreements. Incidentally, if there isn’t enough money in the customer’s checking account to cover the withdrawal, the service is under no obligation to make the payment.
The Biweekly Claim
Since 52 weeks in the year equates to 26 biweekly installments, as opposed to 12 monthly payments, under these plans the equivalent of one additional payment (normally two half payments paid to principle) is collected and tendered every 12 months. As currently configured, the biweekly plans do not provide customers with any advantages they otherwise couldn’t obtain for themselves without the additional cost.
However, the advantage of bill-paying biweekly services is that they are brought to the customer’s attention at the point in the vehicle acquisition process when the benefits can be employed to their full advantage. The savings inherent in the process can be used to include the retail price of a vehicle service contract in the amount financed with little or no increase in the monthly payments. Among the other options, the customer may elect to maintain the same amount financed and pay off the installment sale agreement before the scheduled last payment, which allows him or her to enjoy a reduction in the finance charge.
The costs associated with the plans are reasonable. Depending on the offering, the up-front cost of the service is deducted from the first principle payment, with most charging biweekly payment processing fees. It is also reasonable that the dealer and the program administrator assess a charge and make a profit for providing, on the customer’s behalf, a service of benefit to that customer.
Making the Pitch
When it comes to pitching the biweekly payment service option, you have to be careful. The risk lies in offering assessments of the projected amount the customer will save, or the circumstances under which savings will accrue.
For example, a finance deal with a low annual percentage rate yields little, if any, savings to the customer. Once the total cost of the program is taken into account, it might cost the customer more money than it was purported to save. And, under some circumstances, the biweekly method will reduce negative equity, but by how much? Is it an appreciable amount? Most importantly, will the actual benefit be an amount anywhere close to what the customer was led to believe when the program was pitched?
The better plans disclose the projected savings in documents provided to the customer. And all plans should be capable of generating amortization tables that quantify how the savings or benefits will accrue. In addition to using the benefits chart as the basis of the pitch, prudence dictates that copies of the chart, or similar deal-specific savings representations, should be initialed by the F&I person and the customer, placed in the deal jacket and included in the biweekly plan documents.
An earnest — but overzealous — F&I person pitching a biweekly plan to a financially naïve customer with selective hearing is a recipe for disaster. A presentation based on published, deal-specific numbers will help keep the pitch on point and the customer’s expectations in check.
David N. Robertson is the executive director of the Association of Finance & Insurance Professionals, an organization he co-founded in 1989 to support the in-dealership F&I process. He can be reached at [email protected].
What’s the Holdup?
While it can be argued that true biweekly repayment plans are coming, they aren’t here yet. The current crop of pseudo-biweekly bill-paying services capture some, but not all, of the customer benefits of a direct-to-lender-based biweekly repayment plan.
The obvious benefit of a true biweekly payment plan is that by reducing the outstanding balance in 26 versus 12 increments every 12-month period, the debtor’s cost of credit is reduced appreciably.
The second benefit is a dramatic reduction in the cost of the biweekly service. It is highly likely that true biweekly plans will require the electronic transfer of the biweekly payments. Still, the additional administrative expense associated with posting more than double the number of entries over a traditional monthly repayment program may find its way into a slightly higher APR. However, the up-front cost associated with the current programs will be eliminated.
Comparatively speaking, consumers will enjoy a greater savings and lower cost over what’s currently available — as well as the ease of dealing directly with the lending institution.
Lenders looking to bring biweekly services to the auto industry are faced with a Herculean task of converting their software to process biweekly submittals. They must also weigh the prospect of lower yields generated by an accelerated reduction in their outstanding risk. Given the range of vehicle funding and aftermarket product options accorded by the biweekly “savings,” it is likely any loss of finance charge income will be offset by increases in the amount financed. What is for certain is the first lenders to add the biweekly repayment option will capture an even greater share of the available market.