Over the years, I’ve discovered that most of my colleagues share my passion for sacrificing reserve in favor of products. I might be walking on thin ice here, but, as far as I’m concerned, finance reserve is the least important profit category in the finance office. Yes, we earn a portion of our total profit from reserve, but it provides absolutely no benefit to the customer.
Listen, I realize we should earn something for arranging financing for the customer. We provide a convenience to them and, in most cases, we save them money by matching or beating any offer they can get on their own. Again, I’m not against earning reserve; I’d just rather sell product.
Now, we need to tread carefully when reducing rate in favor of a product sale. Remember, you cannot legally offer a rate reduction as a condition of buying an F&I product. Doing so violates the Clayton Antitrust Act, an amendment created to strengthen the Sherman Antitrust Act. The latter prohibits tying arrangements or the acquisition of one product based upon the purchase of another.
That’s why you can’t pull back a rate reduction offer if the customer elects not to purchase a product. You just have to accept that you lost your potential reserve and move on. In my experience, most customers will appreciate your effort in trying to save them money and are far more agreeable once you’ve announced the reduction.
If losing reserve scares you, consider the downsides of poor rate administration:
-Early payoffs (EPOs): These occur when customers discover their local bank has a substantially lower rate. This also is your first indicator that your rate markups are too high, so watch these carefully.
-Product charge-backs: Each bank likely has its own version of products, which means yours will get cancelled.
-Poor customer service: Credi-bility is lost and the CSI report suffers, which affects everyone.
-Loss of repeat business: The customer will likely do their financing elsewhere — if they return at all.
It’s my belief that far too many F&I managers rely too heavily on finance reserve as a profit center. I recently reviewed a dealership’s month-end report that showed a 90 percent finance penetration rate. Its finance reserve was 67 percent of the store’s profit portfolio. The remaining 33 percent was product. Yeah, I had to do a double take, too. Those numbers should be reversed, with product at or above 70 percent.
“Shouldn’t the bottom line be the only thing that counts?” you ask. Well, wouldn’t the dealership be less exposed to EPOs if the F&I department had turned 70 percent product? At the very least, the log would have revealed more flats and greater product penetration, which translates into greater benefits for the customer and the dealer. And let’s not forget what our products do for fixed ops.
Now, do me a favor. Pull those dealer agreements out from the back of your file cabinet and look them over. You’ll find clauses that say the finance company will withhold a sizeable percent of the rate spread. Depending on credit quality, loan term, vehicle type and other factors, that could be in the range of 25 to 40 percent. So, for every dollar of reserve you think you earned, 25 to 40 percent is withheld by the lender.
Lenders will say they withhold those funds to offset future losses. I suspect they want you to mark it up to increase profit. No harm there, right? So, why don’t F&I managers consider this when structuring deals? One reason is that DMS providers have built the dealer’s commission — with the lender’s hold already subtracted — into their software. The result is the number we see when we recap the deal. Out of sight, out of mind.
I’ve said this before, and I’ll say it again: Finance reserve only benefits the lender and the dealer. Product is good for everybody, including your customers.
And hey, consumer advocates have been after reserve for years. There’s no telling when and if they’ll get their way. So, why not prepare now by concentrating on selling product?
Listen, if your EPOs and charge-backs are satisfactory, then you probably have a good handle on rate administration. All I’m suggesting by addressing this topic is that you review your processes and practices, take another look at your presentation, communicate with your menu provider and agent, and examine the components of your month-end numbers to see how you got there. You might be surprised.
Marv Eleazer is the finance director at Langdale Ford in Valdosta, Ga. E-mail him at [email protected]