Schools are closed or closing for the summer. Most graduations are complete.
It is time to take a look at the grades for your F&I activity.
We have analyzed deals approved for financing in 2015 and generated benchmarks that you can use to see just how effective your F&I activities have been this year. Now, these results are blended across makes, dealership size and geography, so your results may vary – but probably not by much.
Why do this? It is never to late to do better.
One other note – if your store is falling short, you can’t just blame your F&I Manager, or whoever does the desking. F&I success is a team sport and the results don’t start when the Finance Manager gets the deal. Once you see how you are doing, you need to see what the entire, cradle-to-grave environment for F&I is in your store.
Let’s begin with contract buy rates. Across most stores we are seeing buy rates that range from 2.49% to 17.99%.
We are categorizing subprime as those customers, with approvals, who have Credit Scores that average 650, as high 695 and as low as 595. The other factor that puts these customers into our Subprime category is their Available Balance.
The actual Available Balance (how much of their total revolving credit is available for use) is a very predictive number. It is far more telling than Available Percent. If the Available Balance is low (less than about $20,000) they either do not have a lot of credit experience, or they have have a lot of debt…neither of these conditions is great for getting loans.
The average Available Balance for these Subprime customers is right around $10,000.
When buyers are approved in this category, the average Buy Rate is 15.4% (remember that this is the average, we have never seen a 15.4% Buy Rate.) The Average Contract Rate is 17%. These deals, when they close, yield, on average 2.9% reserve.
The average amount financed for this group, including backend, is $10,500.
The challenge with these customers is that even with the approval, the deals actually close only 40% of the time. There has been a considerable effort put into a deal that closes less than half the time.
So, how does your store do here?
Deals with Buy Rates of 12%+:
If we were selling cars, these would be solid prime – but we are not!
These customers have Credit Scores that average 719 and an Available Balance that averages $33,630. For these buyers, scores can range into the high 700’s and as low as 655, but you will see a pattern that a high score is offset by a low Available Balance and vice-versa.
You will know these customers because their Buy Rates will range from 4.9 to 9.95 and will average 6.62. You contract these customers at just over 10% for an average reserve of 3.4%.
These deals close at only a 50% rate, with the buyer’s discouraged by the interest rate.
For both these and your Subprime buyers, your contract rate options are generally very limited. There is little that you could do, in most cases to make the customers feel better about the rate – except to having started preparing them from the second that they started shopping. Going for reserve and negotiating is worthwhile.
This category triples the average amount financed to $33,600. Again, this average is blended across all makes, so if you are focused on high-line inventory, this number may be higher – although the customer’s credit will still restrict what they can finance.
Expectation setting is the key to moving these close rates above 50%.
How is your store?
Deals with Buy Rates of 4.9%+:
Now we are talking!
These customers average Credit Scores of 725 (which doesn’t sound like a big change from Near-Prime) and an average Available Balance of $48,930 (which is a big difference – these buyers have solid credit established.)
The high end of Buy Rates offered for these consumers is 6.99%…and they can also get exceptionally low Buy Rates. You are able to contract these buyers for an average of 7.43% and get 4.32% reserve.
At these rates, you should be closing 85% of these deals.
As we look at Prime customers, the amount financed varies based on franchise, with our blended average showing $48,900.
So, what your grade for Prime Customers?
Deals with Buy Rates less than 7% but generally over 4.49%:
This is the shopper everyone dreams about.
The average Credit Score is 778. They can go all the way to the top. Their average Available Balance is $62,230. There can be a lot of variability, but the fundamentals remain true, lower credit scores mean that they have huge available balances or the other way.
For these customers, you’ll be getting Buy Rates of less than 4.2% on average. You will still some 4.9% rates, but will see the lowest rates available.
You have to be going for the points with these buyers – and when you do, you will average about 4.9% reserve – and you will close 88% of these deals.
As with Prime buyers, we see amounts financed with huge variations largely based on the customer’s appetite for how much they want to finance. In general, this group is approved for almost whatever they want. If you are seeing amounts financed averaging above $62,200 you should be feeling pretty good. You’ll be adding an average of $3,050.00 in funding reserve straight to your bottom line plus whatever backend profits you are driving and whatever margin you are making on the unit itself.
Once again, what does your store do with these Super-Prime buyers?
Deals with Buy Rates less than 4.49%:
There is no judgment in grades. These are just measures that can help you improve – or be content.
One other question – how easy is it for you to actually measure your results against these benchmarks? If you can’t just push a couple of buttons and know where you stand, you need to get your systems to a place where you can.
Keep in mind that this is generally absent the ever-present challenge of backend sales. Those are all additive to the reserves mentioned above and, as a benchmark, should be adding about 30% to your F&I profit.
Making F&I work as a profit center for your store is a full store experience. Understanding your customer is a function of your tools and screening. Putting them together makes you efficient and effective – and profitable.
What was your grade?