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Long Term Finance Programs...Friend or Foe?

I was CC'd on this email today from the Dealer Principle of a major domestic dealership and I found it thought provoking.


There is not a better strategy we can have to secure future growth as a business than short term trade cycle.

Great job so far this month with +40% penetration and incredible increase YOY. We are currently the #1 volume lease dealer in the (xxxx) Region!

Have you "Chosen" your direction?

I have had some great discussions lately with dealers around the country regarding the value they see in focusing on short term leases and finance contracts. There is a surprisingly wide split on this initiative in the dealer universe, and many very successful roof tops and groups sit squarely on opposites sides of the fence.

How important is shortening the trade cycle to long term profitability? How critical is the "now" income generated from the longer finance options?

I get it that in 08 and 09 most of the dealer body was focused on immediate income as a matter of survival...but as the survivors put those days behind them what is the best direction to take?

This discussion is more about the reasoning so many successful businesses and smart people are not taking the same direction.

With so much focus on compensating for the margin compression and low profitability (some would say none) on the sale of new cars, it is understandable that the income from the finance process is no longer the cream, but may be core to profitability. Yet there is a new  wave of focus on the New Car Department's ability to feed both Used Cars and Service where margins and bottom line contribution can be significantly higher.

The Culture

Would you agree that the tradition has been to advertise and attract customers with the "little or nothing" down message? And that most of us have encouraged our teams to use finance term to help our consumers purchase the products they choose?

In fact, our culture is built around low payments and low down payments, inevitably driving longer terms. And our Finance Department and Management compensation plans create a climate in which we have to swim up river to the short term loans, even if we have decided shortening the terms and accelerating equity is in our best interest.

The Dilemma:

Would you agree that it is usually a matter of giving up 3 to 5 hundred on the PFU “now” due to less back end income on the lease in favor of the shorter trade cycle? If you finance 70 of 100 sales at a reduced income of even $300 PFU--that's a $21,000 monthly ($252,000 annual) loss of income for every 100 cars you sell...

But what is the value in Customer Retention, and income in cutting the trade cycle in your store and creating equity 50% sooner?

Equity Search has become all the rage, especially when applied to vehicles in service...and it has been a major contributor to finding incremental sales. Add to that the "trifecta" of the New Car Sale, the Trade profit, and the Service income from the get ready.....its very powerful! Would there be huge value in finding that equity sooner and in higher volume?

Hoping to get some responses from folks way smarter than I as to their decisions and experiences when looking into what may be one of the most important directions a dealership can choose.

Is there a Sweet Spot?

I wonder if there are any dealers who have found the magic “Sweet Spot” and have learned to make good income on the short term finance and leases?

Views: 371

Tags: best practices, call revu, compensation Plans, finance, finance department, lease, loan, pay plans, short term, terms, More…trade, trade cycle


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Comment by Chip King on April 22, 2013 at 3:28am

Thanks David-- Agreed that this movement is not just about the short term Lease, though its a great answer in this climate (see recent post of John Sternal on AAA's 'Your Driving Costs' study- ). Leases, short term bank loans, walk away balloons, re-learning to collect down payment for equity up front--are all in the "sweet spot" of being great for the customer and great for the dealer. And you are dead on that that this revolution begins with a Compensation (Behavior Modification) overhaul.

On rate mark up, I would add that most consumers that intend to borrow would prefer to do it hassle free with one stop shopping at the dealership, and a fair margin for that convenience will stand with very low charge backs. Add to that there is a percentage of consumers that really need what Automotive Finance teams are best at-- getting the loan approved. Loan officers at banks and credit unions don't have skin in the game and say no as easily as they say yes. F&I Specialists in automotive buy their groceries with their ability to solve finance issues....and again a fair margin for that service is good for the consumer and the dealer. Interested in your thoughts.

Comment by David Ruggles on April 21, 2013 at 5:57pm

It doesn't have to be a lease to shorten term.  Auto Financial Group credit unions offer a fully insured, walk away balloon on new AND USED.  Long term contracts are for the weak and short sighted, IMHO.  Yes, you might get to the payment.  Yes, a little rate markup makes even more money at the longest terms.  But you mortgage your future, and rate mark up is just stupid in an environment when there are companies who will call your dealership's customers and refinance them at lower rates.  Those buyers aren't likely to come back to you again.

A revolution needs to begin with dealers and the pay plans for F&I.  If there is no "kicker" for shortening term many F&I departments will continue to take the path of least resistance.

Ken, you were a part of Half a Car?  You know Pete Shyra and Les Springob?

Chip, thanks for bringing up this VERY important issue!  Ralph, thanks for providing the forum!!!

Comment by Ken Bittner on April 21, 2013 at 1:12pm
Those of you that are old enough to remember and recognize me will remember that the team that we. was involved with were the original promotors of "short term trade cycles". If you sit down and do the math on it (all things being equal ie; your team is trained, interest rates are near equal, future values are in line etc) the dealer (and consequently the manufacturer) can reasonably expect about half of the up front buyers to take it and then can expect a 60% renewal rate first car to the second car and 80% plus renewals after that! You end up selling the same customer 5 cars in 10 years instead of 2.
I can tell you why it finally crashed and burned and I can tell you how to keep it from happening again. That's if...anybody really wants to know.

Comment by Bill Cosgrove on April 21, 2013 at 3:36am


There are now walk-away balloon payment programs  being offered for used cars with terms from 24 to 72 –month. When the final balloon payment is due, the buyer can pay off the balloon through a trade-in, private sale, refinance or they can simply walk away.

Whether you lease or sign a balloon agreement, in both situations you have successfully transferred the risk of ownership to the bank. The problem lies with residual values. Residual values are not very predictable and are often inflated to make payment terms more attractive to customers.

When liquidity is pumped into the capital markets to stimulate the economy the market will always find ways to put that liquidity to work. Short term gains take precedence and overindulgence sets in once again eventually resulting in downturns or recessions.

Being a business owner and capitalist I am all for taking advantage of any opportunity to increase profits.

Comment by Bill Cosgrove on April 20, 2013 at 5:35pm

Markets are predictable in that they are cyclic.  When the climate is right and all the stars are aligned overindulgence and overconfidence will reign until the climate changes and the clouds roll in. And there is nothing more human than instant gratification.

This risk of leasing for the manufacturer is influenced by a multitude of factors and often unpredictable.  Residual value risk is typically the critical hazard in providing operating leases. Residual value losses are not immediately observed and strong short-term incentives increase sales, reduce inventory, and signal high quality.  Manufacturers inflate residual values on first year models to signal quality. Manufacturers inflate some residual values even when unnecessary. Overconfidence can confuse likely depreciation.

The lessor (manufacturer) will underestimate the depreciation of the asset. Captive lessors (Franchise Dealers) are also put under considerable pressure from sales and marketing to move product.

 Here is a bit of history on car leasing industry losses when both captives and independent lessors suffered widespread losses.

 2000: Industry losses of $10 billion/year

 2001: Bank One charges $518 million and exits

1997-2003: Bank exits drive leasing from 32% to 20% of new cars

But Short-term pressures will generally outweigh potential losses in 5-10 years and Job or employment length may be shorter than lease term.


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