BEWARE: The Dealership Finance Office

When I started in the car business some years ago, I very quickly came to realize that there was a sacred office in the dealership called the "F&I office" - the Finance and Insurance office.

Inside this office sat a person who rarely came out of the confines of what was often referred to as "the fishbowl". It was called "the fishbowl", because it was usually covered on at least three sides by large windows offering no privacy to its inhabitant. This captive confine was typically the backdrop for an individual who was often seen rifling through stacks of paper, pecking away endlessly at their computer keyboard, and randomly paging the unsuspecting sales consultant to his or her office to berate them about their failure to "clean up their deal."

Nearly every sales consultant that I ever knew while I was working in a subordinate position was scared to death to get on the bad side of the finance and insurance manager. This was the person who ultimately had control over that sales consultant's closed sale. It wasn't just enough to get the customer to say yes to buying a new vehicle, because that person ultimately had to qualify to purchase the vehicle and had to sign contracts before they left the dealership. Thus, the highly revered finance manager was usually the last person to speak to that customer before they left the premises and the last office in which that customer had to agree to the terms and conditions set forth in purchasing a new vehicle that you sold.

I have seen all types of finance managers through the years: males, females, all ethnicities, all shapes, all sizes, of numerous intelligence levels, and of many different personalities. And, I have watched more riff raff, more criminal activity, more fraud, more theft, and more legal violations transpire from this office over and above any other office in a car dealership. Unfortunately, they have the ability not only to rip off customers, but also to rip off other employees and the dealer. Much temptation rests in their hands, and all too often, they succumb to that temptation and others pay the price.

So, if you believe that your sales consultant and his/her sales manager are a challenge to deal with, think again. The finance and insurance manager has more capability to cost you more money than any other department in the dealership.

First, let's examine the finance and insurance position and its function at an automotive dealership:

1) F&I managers are usually specially trained for the job position.

Most banks and manufacturers offer ongoing training for F&I managers who contract deals through their lending institutions and are all too happy to make certain that that manager is as successful as possible. Not only does the dealership profit from your finance business, but also the bank with whom you were contracted; they are the beneficiary of your business. The F&I manager is simply acting as an agent on behalf of the lender and dealership to secure your business and contractual obligation.

2) Dealership F&I managers mainly deal with soft money as opposed to the sales department that deals with hard money. Soft money can be defined as profits made from loan contracting, service contracts, aftermarket treatments, gap insurance, and certain protection policies. The reason that this money is referred to as "soft" is because customers can affect the return by cancelling certain products and policies or satisfying a contractual agreement early which can result in a charge- back to the dealer. Profits made in the F&I office are also known as back-end products, while profit made through the sale of a vehicle and a trade in are considered front-end profit.

Front-end profits are less variable in nature than back-end profits as they are fixed based upon the profit margin you paid over-and-above the actual cost of the vehicle purchased plus or minus any equity or lack thereof in your trade.

3) F&I managers are usually individuals who have been promoted from the position of sales consultant and who are aspiring to ultimately be a sales manager. On the hierarchy chart, F&I managers are sometimes supervised by an F&I Director and ultimately by the sales manager.

4) Responsibilities of the F&I manager include but are not limited to: placing consumer loans with applicable lending institutions, submitting consumer loan criteria for approval to lending institutions (to include prime and sub prime lenders), selling insurance products, selling vehicle service contracts, selling wheel and tire protection packages, selling vehicle interior and exterior protection packages, and other available backend products commensurate with the individual dealership or dealership group's product offerings.

5) F&I managers are usually paid a percentage of the profit that they create through the sales of back-end products and can also be paid a graduating higher percentage based upon their penetration percentage. Their penetration percentage is simply based upon the percentage of back-end products sold in totality divided by the total number of sales contracted.

If you are a consumer who intends to pay cash or bring a check to the dealer from your credit union, this is the situation that the F&I manager dislikes most. When this situation occurs, it is his/her job to convert you to financing with them and one of their banks. It also gives them a much better opportunity to sell you back-end products when they can easily package all the products together for one easy payment.

6) A good F&I manager in a high volume dealership can make $150,000+ per year with no formal education.

7) Dealer benchmarks for F&I managers are typically $1500-2000 per copy (per vehicle sold). So, if an F&I manager contracts 100 car deals and hits the benchmark of $2000 per copy, he/she may be paid 12% of the gross profit, not including any spiffs of products, and make about $22,000 that month.

I have personally known F&I managers who were making $15,000 - $20,000 per month! Someone funds that lifestyle, and it is you.

Oh, I know! You had NO idea that these people made that kind of money, right? Yes, and even the not so great ones make far more money than they should just due to the circumstances surrounding them.

Now that you know a bit more about what these people do, how they are paid, and what they make, it probably makes it a little easier to figure out that they are there to take your money. So, I am going to give you some very sound advice on how to avoid paying one penny more than necessary.

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INSIDER TIPS:

1)  Never finance your vehicle purchase with the dealership.

When I was sitting in a finance office contracting customers, a wonderful interest rate for a prime customer was about 5 3/4%. In today's marketplace, a prime interest rate can be as low as 1 1/2% with your local credit union or banking institution.

As I described, when you agree to finance your automobile or truck directly with the dealership, you are opening up a Pandora's Box for yourself.

The F&I manager has a distinct advantage over you; they know what their buy-rate is for a conventional auto loan and you don't. The buy-rate is the rate that the lender gives the dealer to contact you. The dealer is entitled to hold points i.e. the buy rate with your credit rating is 2.50% and the dealer contracts you at 5.25% holding 2.75% (or points). Furthermore, they know their cost as it relates to backend products, and you don't.

Lastly, as we discussed, it is very easy for them to convince you to package all of your products right in with your automobile purchase for one easy payment. It is highly likely that you will be the loser in this situation. You are simply not set up to win.

2) You will be asked early on in your purchase process how you plan to pay for your new vehicle. Do yourself a huge favor, and tell them that you plan to arrange third-party financing. This may be cash from your personal account or financing arranged with your local credit union. In either case, I cannot stress enough how important it is to save yourself the possibility of aggravation and losing a considerable amount of money dealing with the dealership finance department. These folks can get very good at reciting their canned presentation and some can be very convincing.

3) Manufacturers come up with many slick schemes to convince you to finance with your dealer.

For example, if you are buying a Ford vehicle, you will have the option to finance with Ford Credit. While I can tell you that Ford Credit definitely does not offer the best interest rates, they and other manufacturers will sometimes offer special interest rates such as 0% financing. This special (or subvened) rate sounds attractive, but I suggest passing 99% of the time.

First, while 0% sounds attractive, you typically give up all rebates and customer cash that might otherwise be available to you if purchasing a new vehicle (which I don't particularly suggest anyway). Customer cash and rebates reduces the overall cost of the vehicle providing for a lesser balance financed, and while I could help you to maximize a transaction using special techniques with subvened rates, it is just advisable to avoid the trap altogether.

Second, while the F&I manager loves to hold points on a loan, the manufacturer (captive lender) will usually pay the dealer a flat amount to write the contract using the special rate. If he/she is smart, they are trying to "package" a deal to sell you their products and use the flat to arrive at their commissionable gross profit on the back-end. Remember, that's how they are paid.

4) F&I managers (also sometimes referred to as Business Managers) use what are known as menu presentations in order to sell you products and payments.

Menu presentations can come in the form of a simple 11" X 14" paper form, a computer generated digital menu that is presented on a computer monitor, or can be as technically savvy as a touch screen pad. In any case, the presentation is all the same; it is designed to present you with payment options that package products and interest rate into a payment. In addition, to make it more palatable, the options are often categorized into classes such as: platinum, gold, silver, and bronze.

It doesn't matter how you dress it up, folks. The F&I manager is seeking to get you to submit to his best option to make him money. Even if you don't fall for the illustrious "platinum" package, he will still assuredly make money!

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Best Decision:

As I believe is pretty clear, your best bet as an informed consumer to win this important part of the battle with the dealership is to simply avoid the confrontation altogether. As I often say when advising consumers, as good as you think you are, and as sharp as you may be, you will not easily win. Avoid it...

Do keep in mind, however, that you will have to visit the finance office irrespective of whether you provide your own funds for your transaction. And, that's okay. The business manager is responsible for making sure you sign all documents relative to your purchase and for verifying titling and registration information.

I would also plan on hearing his/her presentation on aftermarket products, special rates, protection packages, and financing. They are only doing their job, and it is harmless to politely listen to their presentation. However, you are going to politely decline their offerings until you are well-versed in the value, reasonable pricing, and validity of additional products that we will address in another article.

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