Thursday, January 22, 2009

This was a recent question from my friends at in Canada. Does anyone have some feedback?

ProfitDrivers asks:

I am looking for some help! I have been informed by an auto dealer here in BC that a recent Dealer 20 meeting (held in the U.S.) revealed that the F&I office was generating ON AVERAGE $4000-ish per unit - largely due to "consolidation" loans the dealership was managing to get approved (& include?) with a car loan for their customers.

I don't know about you but this really surprises me. Your northern neighbors typically don't see averages in this range. Is this common, the consolidation loan with an auto loan? I thought it was tough enough lately to get a deal approved at all, never mind to include consolidation?! Would this be done through a private financial company?

Any suggestions you can offer are appreciated!

AFI's take on this:

Every F&I Managers dream would be to continually "re-finance" a customers’ auto loan, right after the lender’s finance reserve charge-back period expires of course.

Unfortunately this is prohibited in every dealer agreement with every lender in my dealer group. Because of the obvious cost factor, the lenders don’t want the loans that they might have stretched and done favors for a dealer to be re-financed to a different lender through that dealer.

I have never heard of a dealership actually partnering with a lending source that will let the F&I manager “broker” a home-equity or any kind of consolidation loan and keep the reserve as if the dealerships were mortgage brokers or bankers. I think there are regulations prohibiting such activity.

Some of the ways that this could work is the dealership is “holding the paper” themselves and paying the F&I department a percentage of the reserve taken in – very risky. A dealership probably partnered with a mortgage company (probably hearing about it by hiring a previous employee), to send prospects to that company for consolidation loans in exchange for consideration or the sharing of reserve.

This way it would not violate their dealer agreements with their lenders. The vehicle and additional F&I products would essentially be considered a “cash purchase’. But $4000 F&I profit per unit? With rate mark-ups capped usually by 2 points - and operating in this age of full-disclosure and menu selling, it is pretty tough to AVERAGE $4,000 PRU on the back end.

I am curious about the other business practices of these dealerships.



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