Lenders dictating rates? Ponder something else
Sam Dantzler, Columnist
May 16, 2014
Filed under Columns
Let it go.
No, not the movie that we parents have been pulled into for the 17th time. That said, I do indeed, “… want to build a snowman.” I digress. I’m speaking in reference to the apprehension of having rate (flat or not) dictated to you by the lender.
As of this writing, one retail financing company had moved to a flat rate percent of the contract for finance participation, as opposed to the traditional rate spread. That move has irritated more than a handful of dealers, as witnessed by the conference calls I’ve been on as of late. The Big 3 frustrations are:
• Taking away one of our big products in finance
• Killing our PUS (per unit sold)
• I don’t like the lenders dictating our business
So let’s tackle these in reverse order, starting with other people (retail lenders) dictating our business. First off, did we somehow forget who is writing the check? The lender is fronting the dough, so isn’t it reasonable that that same lender should be able to dictate certain terms? That is why when financing is secured through Yamaha, a YES (Yamaha Extended Service contract) can be offered and may drop the rate to the consumer. Yamaha is taking the risk of the loan, so Yamaha can stipulate the conditions. At the point where you’ve got your own, internal financing company, and are writing your own paper, feel free to make your own rules. Until then … Am I the only one who borrowed money from Mom & Dad, only to have Dad dictate the terms and conditions? Did it irritate me? Sure. Did it stop me from taking the loan? Hell no. Didn’t you just move a bike because of that lender? Let it go.
So why exactly is rate participation one of your biggest products in the F&I office? Should it be? Explain to me the value a customer gets from it … exactly. Warranty? Got it. Maintenance plan? Got it. Theft, GAP, debt cancellation … understood. Rate participation? Back in the 1980s and ’90s, getting the financing done at the dealership was a HUGE timesaver. But in today’s modern era, are you really doing me that much of a favor (several hundred dollars worth) to get the deal financed at your dealership as opposed to me securing financing elsewhere? Do you think motorcyclelender.com, cycletrader.com, or the instant approvals on most OEM sites would agree with how “difficult” it is to secure that financing? “Participation from financing” is the icing on the “deal approval” cake. The real magic is that you have lenders to get deals approved right now, even if no money was made on participation. This shouldn’t be your biggest product in the arsenal. Let it go.
The fact that removing the point spread will kill your PUS is directly tied to the fact that it’s your biggest (or one of your biggest) products in the finance office. Removing the spread on the note forces F&I managers to focus on building value in the actual products, which better serve the customer anyhow. When maintenance plan penetration exceeds 50 percent, magic happens with returning customers and dealership profitability. Yes, it’s probably easier to sell $500 on a financing spread, but it’s much more valuable to all parties to sell a $1,500 maintenance plan. And if you really want to have that conversation, we need to look at your refinance rate inside of 90 days. What good is slamming the customer with 4 points on the spread if they go home and immediately refinance? If that does happen, what do you think the customer’s perception of you is?
Lastly, let’s not overlook the lender’s attempt to become compliant, keeping us all out of hot water. How many F&I managers can tell you what the Magnuson-Moss Warranty Act is? Or the Holder-in-due-Course Act? How many of them even have a clue about Red Flag rules? It’s no secret that many in the industry still pack payment (blatantly illegal), while others change rate relative to the amount of F&I product purchased. It’s not legal and it’s not talked about, yet it still happens throughout the industry. You know what else it isn’t? Right, it’s not right. So if the lenders want to protect themselves and your dealerships by limiting (not eliminating) the amount made on the financing they provide, is it really such a cause for angst?
I can’t help but think if dealer’s spent the same amount of energy worrying about what others (lenders, OEMs, competition) are doing, and refocused it on the front door, we’d all be better off. Lest we not forget most dealers aspire to close 10 percent of the floor traffic. What if we got that number to 11 percent or even 12 percent instead of worrying about a flat rate vs. spread? Let it go.
Sam Dantzler is the founder of Sam’s Powersports Garage, a membership website dedicated to best practices and all-staff training. He can be reached at email@example.com.