How do you make money in your Finance Deapartment?
You sell Products!
Some of the products are obvious. Extended warranties are one kind of product, interior/exterior protection is another product. Tire and Road Hazard is a product. Prepaid maintenance is a product. GAP Waiver is a product – for finance buyers.
Well, guess what, Funding Reserve is a product.
Sometimes people wrongly believe that F&I is an administrative function with a sales component. In reality, F&I is a sales function with a very important administrative component.
Now, the guiding principle in Finance is, “First, do no harm” – not selling a unit means that no one makes any money anywhere. The second principle (and this is very close second) is, “You will never make more that what you ask for initially.”
If F&I is going to contribute 50% of your store’s net profit, and it should, you have to successful with both of those principles.
Funding reserves, the amount that the lender pays you based strictly on the contract terms provided to the buyer relative to the contract terms provided by the lender to the dealer, should make up roughly 50% of your total F&I profit. They are presented as a percentage of the amount financed.
Reserves today range from 0% on contracts presented to customers at the buy rate to as much as 7% (and in some special cases even higher) for good credit customers presented with the maximum permissible contract rate. For example, when going through a lender who generally caps the maximum reserve at 6%, if the offered Buy Rate is 3.99% and the contract rate is 5.49%, the reserve would be 6% of the amount financed. If the amount financed was $50,000 that would mean a reserve payment of $3,000 (if the dealer could add just $2,000 of additional backend product profit, they would receive $5,000 of total F&I profit – 10% of the amount financed – not a bad gig if you can get it.)
We sometimes hear that customers get offended because they feel like the first rate that was offered was too high, and then they feel lied to if the second rate is lower. So, first, imagine what the customer would feel like if that sequence were reversed – it would never happen, right? Second, we never hear about a customer being offended because they managed to negotiate a better price on any other Finance product. Reserve is just a product. First do no harm. You never get more than what you ask for initially.
Maximum Funding Reserves are a function of several things:
- Unless the customer has already indicated a specific rate sensitivity, always reach for stars (quickly…if you can let a customer know their contract rate inside the first hour, and they balk, it is easy to let them know that additional lenders may come in with better rates)
- Understand the lender’s rules for Reserves…most prime lenders will give 1% of Reserve for each quarter point increase over Buy Rate, to a maximum of 6% or 7% (during boat show season and for some special reasons, lenders may give an additional bonus); near prime lenders allow for buy rate bumps, but often are close to “point for point” reserve, so high reserves get expensive for the customer; non-prime lenders generally give flat rate Reserves, meaning that they will give a 2% or 3% reserve and do not allow the Buy Rate to be bumped
- Be able to quickly recognize the impact and trade-off of a higher reserve versus the ability to sell additional backend products for higher profits than 1% or 2% of the amount financed
Across all lenders, all inventory types and all credit profiles, First Approval Source is seeing average reserves in the 4.75% and 5% range. Results may vary among local credit profile demographics. That said, target 5% average reserve and you’ll be targeting great F&I results.