Changing opportunities in F&I

As you start review your dealership’s performance in 2003 and begin to plan for 2004, don’t ignore F&I (Finance and Insurance) operations. There are many changing trends and new profit opportunities in this area, and you may even want to hire a specialist dedicated to handling F&I operations in your store.
“There’s a desperate need for (F&I) specialists in dealerships,” says Gart Sutton, an F&I specialist who provides consulting services to dealers and OEMs. Sutton is president of Gart Sutton & Associates, Newport Beach, Calif. “Right now, with privacy acts by the federal government aimed at financial communities, you can’t allow the sales staff to carry the ball and keep up.”
During an interview with Powersports Business, Sutton said powersports dealerships should “identify mature individuals who know what a mortgage is” and who can handle installment loans. Women typically do well in this type of role as financial advisors, says Sutton.
But how does one justify the addition of another person when budgets are tight? Sutton says there are many things an F&I manager can handle, in addition to the F&I duties. The job description can include handling dealer trades, monitoring inventory and managing a rental program, for example.
“In a small store,” says Sutton, “you can justify a business manager because that person can work on parts, apparel and accessories and help make a sale right there. They can fill gaps where the margins are the biggest. You certainly can afford one if you use them properly.”
Working with oem financing
One recent problem seen by some dealers, says Sutton, is the aggressive financing programs being offered by OEMs. With the so-called zero-zero-zero programs offered by some OEMs, there typically isn’t any dealer participation; dealers don’t share in this financing revenue.
Even though dealers may lose revenue when the customer turns to the OEM for financing, there still are opportunities, says Sutton.
“The astute dealer recognizes that these programs do lower the (customer’s) monthly payment,” notes Sutton, “and they do provide an opportunity for selling credit insurance, extended warranties and related products. With the reduced payment, the customer can get all the protection he should have.”
However, Sutton notes that dealers still can participate in some installment and revolving lending programs.
Installment contracts require the borrower to pay a specific amount each month for a specific term. Dealers can make as much as four points on this type of program, but often there is a cap on the amount he can receive. Dealers make their money by, in effect, buying money from a lender and reselling it at a higher rate to a borrower.
Revolving loans, similar to your credit card loan, require the borrower to pay a minimum amount each month. Typically, a dealer will get a one-time two percent fee on these programs.
Dealers can use revolving credit (normally on an OEM card) as a strong marketing tool, says Sutton. For example, dealers can offer discounts that are good only on this card; they don’t have to pay merchant fees to Master or Visa, the dealer’s name is in front of the customer every month when he receives his statement, and the program provides a current customer database.
Dealers shouldn’t be limited to revolving credit, and they should develop four or five credit sources, including local credit unions.
Financing trends
One developing trend in consumer financing, says Sutton, is a move toward risk-based financing, or tier financing. Instead of one rate for all, it rewards those with good credit by offering them a lower rate. “The more ‘credit challenged’ are charged more for C and D paper,” Sutton notes. “But this is only fair because that’s where the risks are.”
Sutton is quick to point out that dealers should be willing to work with customers who only qualify for a “D” rate. “D paper is not bad paper,” he says, “and your customer should not be offended because they are not an A. So, if you get a C or D person, and your finance company will buy that paper, you have a locked in captive customer.” The customer won’t back out, says Sutton, because often he doesn’t have an alternative and he’ll often return for additional purchases down the road.
A relatively new product, GAP coverage, pays the difference between what a customer owes and what the machine is worth should it be totaled or stolen. Often this type of insurance can be marked up 400%, says Sutton, and it can be very affordable to the customer.
Sutton says that, as a rule of thumb, dealers should consider selling extended warranties to 60%-70% of sales; financing on 50% and GAP insurance on 25% of sales.
Prepaid maintenance programs also are good for the dealer because they build customer loyalty. “The beautiful thing here,” he says, “is that the customer is forced to come back for service. And, Sutton points out, the services can be packaged as a good value and put into one contract with the money received up front.
credit life and disability
Credit life and disability makes payments if the customer can’t do so. But selling this requires a state insurance license. A new product, debt cancellation is being developed by OEMs does the same thing but is not an insurance policy.
“It’s just an agreement between the lender and the consumer,” notes Sutton.