Profits and Perils of F&I


F&I experts explain how dealers can increase profits, but it takes effort and training.

Depending on whom you ask, zero-down revolving credit is either hurting the industry or saving it. Dealernews contacted dealers, banks, OEMs and consultants for their take on current health of the finance industry, and everyone has a different opinion.

Almost all agree, however, that dealers need to work harder to finance more customers through increased lending sources and a well-trained F&I manager. In a slowing market in which consumer debt-to-income ratios worsen while vehicle margins remain thin, F&I profits become more crucial than ever.

The biggest F&I news recently is perhaps Harley-Davidson's summer promotion on nearly all its motorcycles: 2.99 percent APR for at least 36 months, 3.99 percent for 48 months, and 4.99 percent for 60 months. Financial reports indicate that the waning subprime market has stung the company, so credit standards for these great rates will be as high as ever.

Harley's own bank finances roughly half its vehicle sales, solely through installment loans. The Motor Co. recorded in April its first quarterly sales decline in many a moon. Now dealers are eager to move not only 2007 models, but some '06 leftovers — before the '08 models arrive in July. They tell us hidden promotions were escalating in the weeks prior to the advertised promotion.

"Many of the dealers are a little perturbed because they would have liked these programs back in the late fall," reports industry consultant and Dealernews columnist Steve Zarwell.

Of course Harley's a different animal than the metric companies, which choose to entice their customers primarily with their private-label credit cards, leading us back to the revolving credit question.

Card Game

Suzuki's private-label card is slightly more popular than its installment loans, and volume is up for revolving financing so far this year, says Dirk Gould, Suzuki's finance manager.

"One of the nice things about the Suzuki Finance Card is customers can use it to pay for service, parts or accessories months down the road after the initial purchase."

This is a benefit to dealers, he says, because company statistics show that approximately 35 percent of card holders return to a dealership within one to four weeks to make additional purchases on the card.

As for zero/zero/zero deals, the argument is often made that only customers with great credit qualify for these plans anyway.

"Basically that's six months free to pay the loan off," says Bruce Stjernstrom, director of marketing for Kawasaki, who adds that Kawi's own no/no/no program is not particularly popular. "A lot of people pay with cash, and this is a way for them to walk in and not have to worry about getting a check from their bank. It's really a convenience not only for us, but for the customer."

Stjernstrom says Kawasaki's regular revolving plan is its most popular financing program.

Detractors of revolving credit insist it's costing dealers future sales. Many customers who would like to trade in a unit after the promotional period of 18 or 24 months can't because they're upside-down in the loan, says Steve Jones, project manager for Gart Sutton & Associates, a dealership training firm. "What does that mean for the industry as a whole?" he wonders. "We have lived with [revolving credit] for a number of years now, and we really haven't seen a huge disaster come of it. Now, arguably, it may be contributing to the slowdown that we are seeing."

Of course, excessively long terms and high rates on installment loans could lead to the same equity problem.

To estimate the revolving/installment ratio, we turn to a statistic provided by HSBC Card and Retail Services (see "HSBC: Colorful History" on page 50). Citing only "market analysis prepared by numerous industry sources," HSBC claims the entire powersports industry represents $23 billion per year in sales, of which $15.85 billion is from the sales of new vehicles. Of that amount, $12.52 billion is financed either by revolving or installment loans, not all necessarily through dealerships. HSBC claims to have the vast majority of the revolving market at $3.5 billion.

HSBC and GE Money underwrite between them all the major OEM finance programs, excluding Harley-Davidson (which, remember, offers no revolving loans) and Honda's installment plan. GE has formal contracts with Honda, Yamaha, Arctic Cat, Polaris, BRP, KTM, Triumph, Ducati and Piaggio. It handles the revolving credit plans for seven of the nine, including Honda's. Even if GE Money's number only approaches HSBC's, the total installment/revolving mix would still be close to 50/50. What's more, GE Money disputes HSBC's claim of having a vast majority of the revolving market.

Revolving credit has expanded way beyond its original use: the financing of smaller vehicles and accessories. Sometimes customers use their cards to finance amounts in excess of $20,000.

The claim that the main value of private-label cards is their marketing worth was somewhat discredited by a recent J.D. Power and Associates survey (see facing page) in which only 18 percent of new-streetbike consumers said finance promotions had a strong influence on their decision to purchase a particular brand. A whopping 59 percent said it had no influence. Then again, dealers also report consumers walking in the door expecting zero-down offers because of what the auto industry has taught them.

So why do dealers lean so heavily on their card programs? The answer given by numerous sources, whether they like revolving credit or not, is that it's simply less paperwork. A few detractors put it more bluntly: Most dealers are lazy. Smaller shops especially are focusing their efforts on the revolving plans and in the process are turning away customers who don't meet the high credit standards that naturally come with such low rates.

Suzuki's Gould probably puts it more fairly when he explains how the financing mix varies from store to store. "We're finding that it really depends on how the dealer is structured," he reveals. "We typically see dealers that do not have established F&I departments utilizing the Suzuki Finance Revolving program because it provides a quicker sales transaction. However, Suzuki dealers with established F&I departments are heavily utilizing our installment financing."

In a sign that maybe the Big Four themselves aren't comfortable with all the revolving credit floating around, Gould tells of a new training program: "To help show our heavy Suzuki Finance Card dealers how they can increase their profits with installment sales, Suzuki Finance recently began offering training sessions for small-to-midsize dealers to illustrate the advantages of having an established F&I department and the benefits of Suzuki installment financing. Our training sessions have been very well received, and we have seen many of the dealers who have attended the training shift their focus to installment financing and F&I strategies that help them sell more Suzuki Extended Protection and other ancillary F&I products."

Local Lenders Could Save Your Ass

F&I trainers far and wide say secondary lending sources are becoming less of an option and more of a necessity.

Sam Dantzler is president of RPM Group (formerly Lemco Management Group), whose network of 20 groups is composed of more than 300 powersports dealerships. "Most of our guys are seeing that if they're only into OEM financing, roughly seven or eight out of 10 deals they can't get bought," he says. "Again, those are the ones that are only using OEM financing, which is why we're firm believers that you'll never get to an A-minus tier status in the finance world if you're only using the manufacturers' financing. You've got to go after the local banks and credit unions."

Carlo Hansen, co-owner of a multiline dealership in Somerville, Mass., makes extensive use of his local lenders. "I can get 6.2 percent on a motorcycle right now," he claims. "OEM financing is hardly ever a good deal. It's easier. That doesn't mean it's better for the customer."

Dealers with only three or four sources of financing should be horsewhipped, suggests consultant Steve Zarwell (only half jokingly). He says a good place for dealers to start shopping is their own bank, though they shouldn't stop there. "I've actually gone to a store, looked in the phone book, printed it on the copy machine and said: 'If you're lazy and don't want to do it, then take Sally up front, the greeter, and have her call all these people and ask them if they do motorcycle loans.'"

A lot of dealers, Zarwell says, don't know that many State Farm and Allstate insurance agents buy motorcycle paper. New-motorcycle owners even mentioned State Farm in the results of the J.D. Power and Associates survey. "It's a way of buying their business," explains Zarwell. "'I'll give you a loan on your motorcycle because I want your insurance business, too.'"

Industry consultant Mike Manthey warns that shopping the local lenders requires tact. Whatever you do, don't abuse them. "They want to know it will be a profitable and growing relationship," he says. "When given the A-credit customer, they will begin buying some C-level customers or more. Also, no bank wants to see that your applicant's credit application is being shotgunned out to every lender in the world. They want to know that they are your first choice. If credit is denied, then go to another bank."

National Lenders

Banks are doing business with powersports dealers on a national level as well. Listed below are just a few we came across in our research. Some offer prime and nonprime plans; others are buyers of bad paper only. (Note: If all this thought of going beyond OEM financing makes you quake in your boots, you might want to skip ahead to the next section on F&I training.)

  • GE Money's FUNancing (866-209-4457, program offers installment and revolving credit options for dealers not already enrolled in any of its OEM programs. Consumers can use their FUNancing Card to spend up to $20,000. Dealers manage the program via a Web-based system that even includes a card-swiper for easier data entry.

Help Me Ride Inc. (732-205-1301, Four years ago industry consultant Larry Cuzzi says he responded to his clients' demand for subprime lenders by going to Wall Street and obtaining a $20 million credit facility. Since then, he has signed up 425 dealers in more than 35 states, though he says only about 140 of them are active — meaning they do at least 10 to 20 deals per month. Cuzzi claims that for the past four years Help Me Ride has been approving 50 percent to 60 percent of what the factories have been turning down, and has been delivering 35 percent of those units. He targets customers with FICO scores between 500 and 640. Cuzzi says every loan is at 17.99 percent for a maximum of 48 months, requires full-coverage insurance, and includes GAP and a four-year extended warranty that honors all factory plans and is good anywhere in the United States. The warranty and GAP tack on another $1,200 to $1,500. Help Me Ride provides three levels of free service: Submit applications the traditional way, doing your own paperwork; let Help Me Ride do all the paperwork for you; or consider it a complete outsource and ask the prospect to call the lender directly. If he's approved, you've gained a cash customer.

  • HSBC's dealer-direct program for dealers not enrolled in its OEM programs is called Rev Charger XL. Shops can earn up to 4.5 percent dealer participation on installment sales contracts. Call (800) 344-4153 for an enrollment kit.

Merrick Bank (888-545-3888, started offering subprime installment loans for cruiser and tourer customers last year and now does business in 40-plus states. This summer the bank is promoting in most of its markets a special program offering loans with three rates: 15.95, 17.95 and 18.20. Dealer participation is 2 percent of the amount financed for loans with a 15.95 rate and 3 percent for loans at the other two rates. Dealers are paid at the time of financing. The bank targets people with FICO scores ranging from 525 to 640 and finances loan amounts up to $30,000. Terms range from 60 month to 96 months. There is no discount on any of the loans.

  • Sparta Commercial Services (800-882-0778, has offered a five-tier installment program since 2004 for prime (starting at 660) and nonprime (starting at 600) borrowers. Sparta does not discount its nonprime contracts and will finance amounts down to $5,000. The company has caused an even bigger stir in the industry by promoting a motorcycle lease program. The J.D. Power and Associates survey, however, found that only 0.22 percent of respondents said they leased their motorcycle.

Western Funding Inc. (888-434-3150, has been in the subprime automotive financing business since 1962 but is still relatively new to the powersports industry. A company rep says Western Funding doesn't even look at credit scores but instead focuses on references, proof of income, proof of residence, etc. The company advances a percentage of the loan's face amount, creates a reserve account, and then pays a percentage of the monthly payments to the dealer based on how his portfolio performs. Interest rates are a minimum of 21 percent or the maximum amount allowed by state law.

F&I Training Pays

Dealers often balk at paying for F&I training because of employee turnover. Owners of small dealerships also argue that having a dedicated F&I person isn't practical given their unit volume and the seasonality of the business. But when you consider that F&I products require no inventory, no flooring and can have markups in excess of 100 percent, these arguments rarely hold water, note industry trainers. Dealers should recognize F&I as a major profit center, they say.

"I think a lot of dealers think they can trot along at $200 [of F&I products] per unit sold, and that's how they justify not being able to afford an F&I person," says RPM Group's Sam Dantzler, who adds that the top 25 percent of his trained clients make closer to $800 per unit. "When you're turning $800 per unit sold, you can justify paying the guy through the downtime."

Dantzler then hypothesizes about the worst-case scenario: the average small dealership. "If you're doing 200 deals a year, if you multiple that by our national norm per unit sold for F&I, which is $528 for non-Harley dealers, there is $106,000 worth of funds available. You can certainly pay an F&I manager and have some left over to carry him through the winter."

Dealers might also consider at least training their sales manager so that he or she can convert to a dedicated finance person during the busy season.

Several companies offer F&I training ranging from affordable online instruction, classroom training and somewhat pricey on-site consultations. Trainees learn about how to deal with lenders and, more important, how to menu sell effectively the large variety of F&I products: extended warranties, pre-paid maintenance plans, GAP, credit insurance, tire-and-wheel plans, and so on. They also learn how to convert a cash customer to a finance customer and about staying in compliance with state laws. On this last subject, Dantzler warns that many state attorneys general offices are taking a closer look at powersports dealings.

As far as costs go, online classes can cost as little as a couple of hundred dollars. For classroom sessions, F&I product supplier Assurant Solutions, for example, offers off-site training for $1,000 plus your traveling expenses. Not surprisingly, the program focuses on the selling of Assurant's own wares. (The company recently purchased RPM Group, and although they will share resources, the companies will continue to operate independently.)

Then there are on-site consultants. Mike Manthey & Associates, for instance, charges $1,500 per day, with travel allowance, per consultant for initial assessments or seminars. Larger projects involve specific proposals.

Gart Sutton & Associates says it works independently of any F&I company, allowing it to partner with several OEMs to offer regional workshops. The training is provided either at no charge or as part of a co-op.

Several other companies offer regional seminars on a yearly or quarterly basis. Contact these trainers to see which seems like good deal for your budget. You may want to start with the list of companies on this page.

Finally, some dealers never seek F&I knowledge because they have a personal distaste for the products. Steve Jones of Gart Sutton & Associates, however, thinks the stigma is fading.

"Dealers are recognizing that F&I is not a dirty word," he says. "It is not a bad thing. Customers like things like extended service contracts and, particularly for the higher-end stuff, GAP."

Jones thinks the OEM programs themselves may be inspiring dealers: "All of a sudden they go, "Wow, we actually make a point here. That's extra money."