Behind the Scenes: The Finance Department
Every dealership has a finance department; some are made up of a single individual, while others have a director or directors with several producers under each. Have you ever wondered why you are more or less herded to their office even if you are stroking a check for your newer vehicle?
Dealerships contain multiply profit centers under one roof that operate together (for the most part), like most businesses. The finance department is just one of the many departments within the dealership that is in place to turn a profit and streamline the customer experience.
You may think that because you’re walking in to a dealership to write a check for your new vehicle, that you may be able to skip the finance department and cut your visit short; oftentimes, you’d be mistaken. From a legal standpoint, it is to the dealerships best interest to have a small number of employees that are trained on all of the current privacy laws and are organized with their paperwork. With the current privacy laws, if someone were to accidentally leave a completed credit application laying around, it could be up to a $10,000 fine.
Those cases are far and few between, so there must be another reason you won’t be able to avoid the step in the process! The two main reason are: convenience and more importantly, profit.
The convenience factor is not the main reason, so I’ll just touch on it. If the financing is secured in-house and the banks offer fits the signed contract, the contract is immediately cashable. If a consumer has to go to his own bank the day or two after, then it’s not as convenient for the consumer and the dealership has to wait another day or two to deliver the vehicle. A lot can happen in a day or two; often times more objections come up, early cases of buyer’s remorse, etc can all happen to throw a last second wrench in the deal.
(In no way am I saying it is ok to ‘slam’ someone in a car that they aren’t sure about, but it is human nature to get ‘cold’ on a purchase after the initial excitement wears off.)
PROFIT. Moo-lah. Cash-ola.
Profit is the biggest reason that every customer will meet with a member of the finance department. There are two main ways that the finance department turns a profit: through the interest rate, and through selling products.
Interest Rate.With the ever changing consumer protection acts, the ability for the finance department to make money on the rate is evolving. A lot of banks allow the dealership to make up to 2.5 points on a <60 month term, or 2 points on a <75 month term. What that means, is the bank approves the customer for a 3% interest rate, the dealership signs the consumer at 5% or 5.5% depending on the term. The bank then pays the dealership the 2-2.5% of the loan up front. The consumer protection acts are forcing banks to go to paying ‘flats’. What this means, is that instead of marking up the rate, the dealership is required to sell it at the rate that was approved by the bank, then the bank pays a small flat (either fixed or a small percent) to the dealership for sending them the deal.
In the example above, the buy rate is 6.49%, and the rate signed is 8.99%, yielding a $828.72 profit, just in rate, before any product is sold.
Product.It’s a 50/50 split whether people believe in extended service contracts or not. I don’t personally purchase them on anything that I wouldn’t be willing to 100% cover the cost of a complete replacement (TV’s, computers, etc), however I do put them on my more expensive purchases (vehicles, UTVs, etc). Extended service contracts are not the only product that can be sold, other options include GAP insurance (covers the ‘gap’ from what an insurance company will pay on your total loss, and what the balance of the loan is), tire and wheel (very comparable to a road hazard plan, it will cover damage done to your tires and wheels caused by an obstruction on the road), a form of key/windshield replacement, door ding/PDR repair, maintenance (normal maintenance schedule covered at ‘no cost’) and an array of other products that differ from store to store.
The majority of finance producers are on a stair step pay plan that is calculated by taking their average gross per vehicle signed, total product sold, and total gross produced. If a producer needs to sell product to hit his highest payout, and he’s already met his gross total, which means you are going to have a VERY good chance of buying product at cost.
This example shows typical profit margins for a few examples of product.
The industry average per vehicle signed is about $850, which includes the rate payout, and product sold; if you add up the two examples I gave they add up to about $1,700, which is MUCH higher than the average.
While this makes it seem like the dealership is out to take your hard earned dollars, the finance department is also able to save you money and an unnecessary trip to your bank or credit union. A lot of banks and credit unions offer dealerships discounted rates, because the dealership is going to be responsible for completing the paperwork. For example, you may be preapproved through U.S. Bank for a 2.99% rate for 72 months, but if you came into the dealership, we could sign you up through U.S. Bank for 2.69% and save you money. In this instance, U.S. Bank would pay the dealership a flat to make it worth our time to do.
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