Confessions of an Auto Finance Manager
Part 3: Lessons From the Other Side of the Desk
Lessons From the Other Side of the Desk
Most people had no idea what they should be paying for a car, except that maybe their cousin had bought the same car and they knew what he paid. And that was exactly where the dealership wanted you.
At my new dealership, I started to make some serious money — six figures — which went a long way in the Midwest where you could buy a mansion on a lake for a $100 grand. I was still pretty young and yet I was advising people on loans, looking into their finances and working with large sums of money. I have to admit I was proud of what I did and it gave me a feeling of power.
And then I made a change that doubled my income. It had to do with a new sales technique, a method called "menu selling."
The Joy of "Menu Selling"
The way I had been selling F&I products was to roll out the items one by one, pitching the advantages and features of them. It was a long, grueling process for me and the customer. Menu selling revolutionized all that.
What I did was group all the products I sold into packages and give them fancy names like the Platinum, Gold or Bronze package. If the salesman had quoted a $400 payment, I would begin my pitch by saying to the customer, "I understand your salesman quoted you a payment of $400 a month. That will take the car today. But, let me take five minutes to go through a few options, and you can choose which one works best for you."
Then I'd say, "The first option is the Platinum plan, a five-year loan at 8 percent, which has a seven-year, 70,000-mile extended warranty, which more than doubles the factory warranty. It includes life and disability insurance; it also offers paint protection and undercoating. The payment for that is $480 a month." Then I'd describe the Gold Package which would have a payment of $440, and the Bronze at $420.
Here's the funny thing: half of all customers would pick one of the plans without asking any further questions. That means I just sold three things with a five-minute spiel whereas previously it took half an hour and I wound up sounding like a broken-down vacuum cleaner salesman.
The power of menu selling is that you are asking people to choose which of three things they want. Their focus is on selecting one of the three things, not realizing that they don't have to choose any of them. Choosing one of these packages was a big mistake for some customers. But it wasn't the only mistake they'd make.
Wrong Price Point
After a few years of closing deals in the finance and insurance office, I began to realize that 90 percent of my customers made the same mistakes when buying a new car. Because of this, I realized I could make even more profit than I chose to. In a way, I had to be self-regulated — I decided what a fair profit was and consequently what my commission would be. It was often hard because it was like a baseball home-run hitter passing up a fat pitch — I knew if I wanted to I could make more money and be the hero of the dealership for the next week. But I didn't want to hurt the customer, this person I had gotten to know and whose trust I had won.
Not all F&I guys felt this way. Some went for maximum profit on all deals and applied all kinds of pressure to the poor customer to achieve this. Some F&I managers were bullies who just wouldn't take no for an answer. And they made outrageous claims to back up their sales pitches. For example, when presenting the extended warranty, they might tell their customer that the financing that was being offered required them to buy the extended warranty. This was a lie. But how was the customer to know?
It sounds really basic, but the biggest mistake customers made was not knowing the price they should be paying for the car itself. And that was exactly where the dealership wanted them. Maybe their cousin had bought the same car and they knew what he paid, but they rarely did any more research than that. As the Internet has come of age, there are all kinds of ways to research price, including Edmunds.com True Market Value ® (TMV) pricing and forums where buyers share pricing information. If a buyer knows the invoice price of the car, as well as any incentives available at the time and allows the dealer a profit above that, they can estimate what they should pay. But even today most buyers don't take the time to do this. And they overpay as a result.
Another big mistake I saw customers make was agreeing to be a "monthly payment buyer." The majority of car buyers are going to finance the car (instead of paying cash) and they want a payment that will fit in their budget. The salesman knows this and works in league with the sales manager and F&I guy to leverage their power against the customer. Here's how this tag team works.
Car salesman: What kind of monthly payment are you folks looking for?
Customer: About $400 a month.
Car salesman: Up to...?
Customer: Um, well, no more than $450.
Car salesman: Well, that's kind of low for a great car like this. But I'll see what I can do. I'll be right back. (The salesman leaves and goes into the sales office to huddle with the F&I guy and the sales manager.)
Sales manager (to F&I guy): How's their credit?
F&I guy: Over 700.
Sales manager: Awesome. (To salesman): OK, tell Mr. Customer that $500 will make a deal. (The salesman returns to the customer holding the sales deal sheet with the managers' scribbling on it.)
Salesman: Good news, folks. We can make a deal today for $500 a month.
What's just happened? Well, the sales office is preparing to pack the payments. We'll say that they could actually sell the car for $450 a month but they got the customer to agree to an extra $50 on the payment. That $50 a month "bump," extended over a five-year contract, is an extra $3,000.
Now, when I got the deal in the F&I room, I knew all I needed to do was find products and services to fill up that extra $50. In a way, the customer had already bought the things I was selling. All I needed to do was justify the extra expense. This was easy since I could sell them an extended warranty, inflate the interest rate or juggle the numbers to add up to the total payment.
The Most Dreaded Phone Call
I don't want to imply that things always went smoothly in the F&I room or that the customers were easy to deal with. Sometimes married couples got into fights right in front of me — he wanted to buy the car but she didn't — and they treated me like a marriage counselor. Also, since I worked in a small town, everyone knew each other. So if people got mad at me it was really uncomfortable. If they felt they were cheated or lied to, sometimes it escalated to a physical level. And believe me, in a small town they know where to find you.
There was one type of scenario I always dreaded because it led to some horrible situations.
As I mentioned earlier, we had some customers whose credit was weak but who might still qualify for financing. However, it could easily take a few days to shop all the banks and get a solid answer. We didn't want to let this customer get away (we stood to make a lot on their financing) so we would let them drive off in the car while we continued shopping for a loan. But if we were unsuccessful, things got sticky.
We had to call the customer and tell them to bring the car back to us. If they protested, we told them that they had signed a form for "acknowledgment of conditional delivery." This was a document we always had customers sign that said if we couldn't get the car financed at the terms we agreed on, then they would bring the car back. The customer usually said, "Sure, sure, whatever" and signed it, but later they seemed to forget about this form.
The most dreaded phone call in my business was when you had to call the customer and tell them to bring the car back. The F&I guys tried to push this off on the salesman, and they pushed it back on us. Sometimes I called the customer and said something vague like, "There are a few changes we need to make to the contract so we need you to bring your paperwork and the car back to the dealership." Other times, I was more direct: "We weren't able to get the loan financed so we need you to come back so we can discuss other options."
Customers often became really emotional when they had to return the car. They had already shown the car to their friends and family and had developed an attachment to it. Now the dealership was taking it away from them. It was an unintentional form of public humiliation.
In one case, I was dealing with this young hotheaded guy who had bought a pickup truck, and we had to call him back in. I had a feeling there might be trouble so I brought my sales manager into the meeting with me. When we told this guy we were taking his truck back, he actually jumped over the desk, grabbed the sales manager by the throat and started strangling him. We had to call the police and the guy was taken away in handcuffs. It was sad because he had his little boy with him and he saw the whole thing.
10 Things Not To Do in F&I
Over the years I put together advice for my friends and family when they were going to buy a car. In most cases, my advice was simply what not to do! Here is my Top 10 list that should get you in and out of the F&I room unscathed.
- Don't agree to be a monthly payment buyer. If you do, you'll quickly lose control of negotiations as they pack payments and hide the real cost of the car.
- Don't buy a car without first checking pricing guides such as Edmunds.com's TMV. Print out this information and take it with you to the dealership.
- Don't buy the extended warranty. The bumper-to-bumper warranty will last for at least three years/36,000 miles. The powertrain warranty will then cover all the things that make the car go down the road, often for up to 75,000 miles.
- Don't buy the extended warranty (if you really want it) for the first price they offer. Mark-up is about 100 percent, so there is plenty of room for negotiating.
- Don't enter the F&I room unless you have independent financing or you have recently checked your credit report and investigated what your bank or credit union will offer for a rate. Otherwise, how will you know what interest rate you deserve?
- Don't buy paint protection (it's just a glorified wax job) or fabric protection or VIN etching or LoJack (unless you have an irreplaceable collector's car). These are high-profit items for the dealership and can always be purchased somewhere else if you decide you really want them.
- Don't pass up gap insurance if you're leasing (unless it's already in the contract).
- Don't forget to run your monthly payment numbers using an online computer to get a rough idea of what your car payment will be.
- Don't believe that the F&I guy is really your friend, even though he acts like it.
- Don't believe the F&I guy if he tells you that you have to buy the extended warranty to qualify for low or no-interest financing. I've used this line a few times before. And it's not true.
Getting out of the Business
I never really planned to make a career out of being an auto finance manager, so after about six years I became restless and was looking for a change. I still wanted to finish my graduate degree. My sister had moved to the West Coast and I was tired of being landlocked in the Midwest. I quit my job and moved to the Los Angeles area. Initially, I went back to working in F&I but I found out that the job was much different there. The sales manager called all the shots and the F&I guy was nothing more than a glorified salesman hawking products. I missed the financial advisor aspect of the job. So I left the business altogether.
Looking back, I don't have any regrets about what I did. I helped people buy cars and I got them loans that enabled them to do that. But I do feel funny about all the mistakes I saw my customers make, mistakes they made that stretched their household budgets thin and put stress on their lives and relationships. While it struck me that the F&I office is a necessary part of dealerships, it's up to car buyers to educate themselves about how to safely navigate the tricks and sales pitches they'll encounter.
The final part of this series will cover a few more points and the dealer's side of the story. But for now, I hope my story has better prepared you for your next car-buying experience. And if the F&I guy questions your decisions, just tell him you got your information from an inside source.