Confessions of an Auto Finance Manager
Part 4: In Defense of the Finance and Insurance Office
Everything they sell there (in the F&I office) has a benefit to it — at the right price. The problem is that most people don't have the facts to negotiate intelligently for these products, so it becomes a guessing game. — Oren Weintraub, car buying specialist and former car dealer
While interviewing Nick James for the first three articles in this series, I often found myself wondering why car buyers even tolerate the finance and insurance process. It's time-consuming, frustrating and often costly. I kept thinking that F&I could be eliminated and the car salesmen could just draw up the contracts themselves. Customers would certainly prefer to deal with one person throughout the whole process.
After talking to industry experts I learned that the answer is twofold. Preparing contracts and arranging loans is best left to a financial expert. Secondly, as the contract is prepared, the consumer is in an excellent position to be sold additional products and services. They are, as Nick James put it, "in the 'yes' mode." And the money made in the F&I office is essential to the dealership and the salespeople.
As profit is squeezed out of the front end of the deal (many cars now sell close to the invoice price) and profit margins shrink (from about 6.5 percent gross profit on a new car in 1998 to 5 percent in 2007), revenue generated in the finance office is more important than ever before. The National Automobile Dealers Association (NADA) estimates that new cars are often sold at a loss now, with dealerships making money on used car sales, F&I products, parts and service.
F&I's "Vital" Statistics
According to 2007 statistics from NADA, 28.5 percent of the profit made from selling a new or used vehicle was generated by the finance and insurance office. This rose slightly from the previous year "partly from a renewed focus on F&I," a NADA report stated. The money made in F&I comes mainly from arranging loans but also from selling extended warranties and other products and services.
How much money is made on a typical sale? According to F&I Magazine, an average of $947 is contributed by the F&I officer selling dealer financing, and an extended warranty typically adds $795 in profit. Another $438 can be generated by selling gap insurance, which covers a financed car that's been lost or stolen beyond what regular insurance covers.
While most people aren't even aware they will visit the F&I office while car shopping, they'll spend at least 30 minutes there out of the 123 total minutes typically spent buying a car. Another 48 minutes are spent in the sales office and the rest is spent in the showroom, F&I Magazine reported.
Financing is the most often accepted product offered in F&I, with some 58 percent of customers agreeing to take dealer-arranged loans. The next most purchased offering is the extended warranty, with 30 percent of customers saying yes to this. Gap insurance, prepaid maintenance plans and theft deterrent systems are also commonly purchased by customers prior to signing their car contracts.
The Human Side of F&I
From these statistics, it's easy to see why the finance and insurance office is viewed as a profit center for dealerships in increasingly hard times. But what do customers think of their F&I experience?
"They hate it," said Oren Weintraub, a former dealer in the Los Angeles area for many years and now president of Authority Car Buying Specialists. "[The customer] spends all this time negotiating for a car and they're exhausted. Then, along comes this guy asking if he can sell you something extra for another $15 a month."
To be fair, he added that good F&I officers can alert customers to other financial safeguards such as gap insurance, which is increasingly important as car buyers tend to be more upside-down on their loans.
What about the value of the products sold in F&I? "Everything they sell there [in the F&I office] has a benefit to it — at the right price," Weintraub said. "The problem is, most people don't have the facts to negotiate intelligently for these products so it becomes a guessing game."
On the Front Lines of F&I
For another point of view I contacted Jon Garcia, an auto finance manager at Hesser Toyota in Janesville, Wisconsin. He has worked in the F&I office for the past four years following six years of selling cars. He said that he believes his knowledge of loan financing can "save money for the customer and still make money for the store [the dealership].
"I want my customers to go away happy," Garcia said. "If they don't, they might shop for a better rate and cancel the loan I sold them."
Still, Garcia acknowledges that there are abuses in the business. "There is a fine line," he said. "There are managers out there that are on a different pay plan. They will take a $2,000 profit on [an extended] warranty. But if you are planning on staying with the dealership long-term you don't do that."
A Changing Landscape
Customer complaints about rip-offs in F&I have led to increased regulations. In recent years, legislation has been passed that prohibits payment packing. As Nick James described in Part 3 of this series, packing payments means that the customer is persuaded to agree to a higher-than-needed monthly payment. The extra wiggle room created is then filled with products and services sold in F&I.
I called NADA's Washington D.C.-area office and a spokesman asked me to submit a list of questions about the abuses in the F&I industry, including payment packing. I received this answer via e-mail from Paul D. Metrey, NADA's director of regulatory affairs: "Unlawful practices have no place in our industry and need to be discouraged at every opportunity. NADA stresses this point in its Code of Ethics, speeches to industry groups, training material and through numerous workshops at its annual convention and presentations to dealers and dealer managers around the country."
Metrey's e-mail went on to say that NADA works with government agencies such as the Federal Trade Commission to educate dealers and eliminate unlawful practices. He added: "The overwhelming number of franchised dealers recognize the need to both reinforce these key compliance messages and ensure they are a central part of their employee training programs."
In other words, good dealers don't break the law. Specifically, good F&I officers, like Jon Garcia, want their customers to "go away happy" because he wants to stay in the business long-term. A friend of mine recently bought a new luxury SUV and said it was "by far the best car buying experience I ever had." And what happened in F&I? "He didn't even bring up the extended warranty," my friend said.
Still, unsuspecting customers are walking into F&I rooms unaware every day. I recently bought a car from a Los Angeles area domestic car dealership. My salesman drew up the contracts and presented them to me himself saying, "If I sent you into F&I here, you'd hate me. These guys won't take no for an answer." They are what are known in the business as "heavy hitters."
What is the average consumer to do to prepare for an encounter with a "heavy hitter" or even just a silver-tongued salesperson with a carefully crafted sales pitch?
Metrey wrote a response to this question: "We strongly encourage consumers to educate themselves about the financing process just as they do with the vehicle purchasing process." NADA has created AWARE to provide consumers with car financing tips and information in English and Spanish through an interactive Web site. Dealers have also stepped up training for their employees to enhance transparency in the auto finance department.
While the official message from the top is that consumer education is encouraged, Nick James said during our interviews that the informed customer was the one most hated by F&I officers. And every car salesman in the world has at one time or another scolded his customers by saying, "Just trust me."
What's a Car Buyer To Do?
The more I thought about the F&I office, the more I felt there was no easy resolution to its problems. While customers hate it, the dealer's existence depends on it, particularly in hard times. Furthermore, having an expert handle loans and contracts makes sense and allows the salesman more time and freedom with the customer.
Bottom line: When the F&I process is done right, and the customer is informed, it works.
I have one final piece of advice that will head off all other problems. While being educated on the process is important, it's also essential to pick your dealership and salesman carefully and pay close attention as your F&I officer presents your contracts. There are good people in the car industry. Find them and give them your business.
Read more articles in the Edmunds Confessions Series.