Читать книгу A Unique Approach To Car Buying - R. L. Bowman - Страница 6

In this chapter I’ll explain how the Finance Department operates and creates profit. This Department actually functions as a division of the Sales Department. There are two major areas of the sales process for which the Finance Department is responsible.

The first area of responsibility is the processing and funding of the car deal. Contracts and other official paperwork from the deal are processed, packaged and sent to the lending institution for funding.

Once the lending institution receives the package, they verify all the information, stipulations the lending institution may have imposed as a condition of approval, and fund the package. This is referred to as “funding the deal.” The lending institution, in most cases, electronically transfers the money to the Dealer’s account.

The second area of responsibility is creating profit. It is the job of the Finance Department to “enhance” the gross profit of the car deal. You may recall in the previous chapter, I explained the difference between “front end gross” and “back end gross.”

This chapter explains how back end gross is created. Before I dive into the detail of how profit is created, it’s beneficial to understand the hierarchy of the Finance Department and the individual responsibilities of its personnel.

Larger dealerships employ a Finance Director who has a unique set of responsibilities. The first responsibility is to oversee the Finance Department operations and ensure that the dealerships profit objectives are meant.

The Director’s main functions are to build a rapport with lending institutions, monitor funding statuses and ensure compliance with state and federal laws on behalf of the dealership. The Director also assists the Sales Manager in assembling the “deal structure,” or how the loan proposal is presented to the lending institutions. This is a very important part of the selling process.

Most Directors have approximately seventy lending institutions at their disposal. Each one has their own specific lending guidelines, and it is the Director’s job to know what lending institution will buy a particular deal structure.

The Director’s job also entails using the rapport that has been established with the lending institutions, to buy “grey area deals,” or deals that may not fit the exact guidelines of the lending institution.

Finance Directors are normally paid based on the combined profit of the Sales and Finance Departments, plus bonuses for meeting the dealership’s objectives, such as warranty and GAP sales.

Below the Finance Director, are the Finance Mangers, also referred to as “Contractors.” These are the individuals customers meet with to sign all the necessary paperwork in regard to their car deal. The main function of the Contactor is that of a Sales Person.

The dealership has a number of products and services available for purchase that can be included in the total amount that the customer finances. These products and services are referred to as “add ons.” Some of the “add ons” include such things as; extended warranties, wheel and tire protection, GAP insurance, paint sealant, interior fabric protection, rust proof undercoating, and an array of other products and services that vary from Dealer to Dealer. I will cover the validity of these products and services in a later chapter.

It is the job of the Contractor to “upsell” the customer during the contracting process. The Contractors are normally paid a commission on the products and services they sell to the customer. Contractors, in most cases, also receive and incentive bonus or “penetration bonus” for the sale of certain products or services.

Here’s an example; if a Contractor were to sell 50 warranties in a month and contracted 100 customers, the Contractors penetration would be 50%. The Contractor would receive a $1,000 bonus on top of the commission earned for the month.

Why is this important for you to understand? Let’s say it’s the 29^th of the month, the Contractor has 49 extended warranties sold for the month, and you would be interested in buying an extended warranty. Do you think the contractor would dump the price of the warranty to get you to buy it right now, and make their bonus?

Are you starting to see the reason I’m explaining all of this? If you can identify what another person’s motivation is, you can use that to potentially save thousands.

Now, let’s discuss how the Contractors generate profit for the dealership. There are essentially three profit categories in the Finance Department. They are Products, Services, and Reserve. These are all back end items.

You may be wondering why the profit of a car deal is divided into “the front end” and “the back end.” The answer is simple. Back end products are referred to as “cancellable” items. Front end profit, as you may remember, is the profit made on the sale of the car. Back end profit is created from the “add on” products as we previously discussed.

Lending institutions do not consider products, services, or reserve a part of the collateral that secures the loan. They will advance funds for the purchase of these items, but most of these items have termination or expiration dates.

The lending institutions consider them optional. Most of these items contain options in their specific agreements to cancel the service they provide “at will.” This is very important to be aware of when we start to put everything together in a later chapter.

Products consist of items such as extended warranties, GAP insurance, Life and Disability insurance, and wheel and tire warranties. Extended warranties, are really not warranties, they are Extended Service Contracts. Only a manufacturer can offer a warranty.

The general term that is used by the public is “Extended Warranty,” when referring to Extended Service Contracts, so to keep this simple, that is the term I’ll use. Extended warranties can be sold on new cars as well as used cars.

The purpose of purchasing one on a used car is obvious. But what about extended warranties on a new car? There are advantages depending on the customers driving habits. Extended warranties on new cars tend to be less expensive.

If the customer drives 20,000 miles a year, the manufacturer’s 3 year/36,000 warranty would expire in just a year and a half. It’s possible to extend the years and mileage and tailor it to the customer’s needs. Prices vary by make, model, term and the deductible that is chosen.

The specific cost is then marked up by the Contractor, usually $1,000 or more, and sold to the customer. The price the customer pays is negotiable, however most customers have no knowledge of extended warranty costs, and do not understand how to negotiate an “intangible.”

GAP insurance is an abbreviation for “Guaranteed Asset Protection.” There are two types of GAP. The first one is an insurance product. It is regulated by the State’s Insurance Commissioner. The cost and selling price are fixed and there is no negotiation on its price. Because it’s an insurance product and is regulated, it’s guaranteed to pay off.

The second type of GAP is the “Gap Wavier.” The GAP wavier is not an insurance product, and is only as good as the company that issues it. A GAP wavier has a fixed cost; however the selling price is negotiable. Both GAP’s provide the same protection.

Here’s what GAP provides. In the event a vehicle is stolen or totaled in an accident, the insurance company is only required to pay “fair market value” on the policies they issue. If the fair market value of the vehicle is less than the amount that the customer owes the lending institution. That creates a deficiency balance. The customer is still responsible for the balance owed to the lending institution. GAP pays off that deficiency balance to the lending institution on behalf of the customer.

Some states do not allow GAP waivers. The Dealer’s choice is usually the GAP waiver if allowed by the state. This is due to the fact the Dealer can determine the mark up. The Contractor marks up the price from its cost which is usually around $200 to $250 and sells it to the customer. I’ve seen GAP sold for as much as $999 on deals. That would be a profit of over $700!

The next product is Life and Disability insurance. This is pretty much a dinosaur product. Most dealerships don’t offer it anymore. It’s expensive and the amount of profit it creates is a small margin compared to other selling opportunities the Contractor has available.

The next profit center for the Finance department is called “reserve.” Some lending institutions will pay a commission to the dealership for sending them the deal. The commission is paid in “points.” On the approval sheet from the lending institution, there will be a “buy rate” and a “sell rate.”

The dealership has the ability to “hold” those points and contract the customer at the “sell rate.” Most lending institutions “cap” the total points that the dealership may hold. Usually, it’s around 2 points.

Here’s an example of how reserve creates profit. A loan of $20,000 with the dealership holding 2 points would equal about $800. Some lending institutions pay a “flat,” like $150 to the dealership for sending them the deal. Remember, most dealerships have about 70 lenders at their disposal. It’s competitive out there, and the lending institutions all want the dealership’s business.

I’d like you to look at the amount of profit that was just generated in the last three examples. $1000 in warranty profit plus, let’s just say only $350 profit in GAP, and the reserve of $800, equals $2150 in back end profit in just about 20 minutes. And there’s more. Remember the “cost money” for the warranty and the GAP?

The dealer takes that money and invests it what is called “reinsurance.” The cost money is placed in a trust that is invested, creating more profit. Warranty and GAP claims are paid out of the trust, and as more warranties and GAP policies are sold, the reinsurance trust grows. Are you starting to see “why” it may appear that a dealer will “lose” money on a car and sell it thousand’s below cost!

I’m not going to spend much time on the other products and services that might be offered. They consist of paint and fabric protection, identity theft protection, etching, and an array of other items to part the customer from their money. Their names are somewhat self-explanatory.

In my career, I never liked them and saw very little value to the customer. There are people who buy them, mainly because of the selling system that is employed. I’ll discuss this in the chapter on “Selling Systems.”

In the next chapter I will explain the various selling systems dealerships employ to sell a customer a car. They have been around for years, and they’re not going away. Your comprehension of how these selling systems function will put you “light years” ahead of uneducated customers when entering into the negotiation process.