Megas Up F&I Yields, Cap Rates

Without waiting for all captive lenders to act, some megadealer groups are capping their vehicle loan surcharge rates at 3% or less. This trend comes to light during financial reports by publicly owned dealership chains, all of which boosted their finance & insurance yields in 2003. For arranging financing, dealers charge a percentage on top of a loan's interest rate. Depending on the risk, dealers'

Without waiting for all captive lenders to act, some megadealer groups are capping their vehicle loan surcharge rates at 3% or less.

This trend comes to light during financial reports by publicly owned dealership chains, all of which boosted their finance & insurance yields in 2003.

For arranging financing, dealers charge a percentage on top of a loan's interest rate. Depending on the risk, dealers' surcharges can run 10% or more.

Capping of loan rates first surfaced last year when Nissan Acceptance agreed to a 3% limit in a settlement of a minority rate-bias federal suit in Nashville, TN.

Early this year, GMAC reached an out-of-court settlement in a similar case, setting ceilings of 2%-2.5%.

Also fueling the trend is that individual stores of some chains have been in hot water for F&I improprieties.

Group 1 Automotive Chairman B.B. Hollingsworth Jr.. says the firm has a 3% cap.

“Income from loan reserves was affected,” Hollingsworth says. “But we felt the limit on interest was consistent with the Group 1 mission statement calling for ethical treatment of all customers.”

To offset the decline in reserve income, Group 1 focuses on F&I menu selling and increasing sales penetration for extended service agreements and GAP contracts.

In 2003, it raised its F&I income per vehicle sold to a record $1,006. Runner-up Lithia Motors was at $945. Analysts set $1,000 as the benchmark.

For early 2004, the cap on loan fees could reduce the F&I yield to $925-$1,000, says Hollingsworth.

Joining in the rate-capping trend is United Auto Group. Chairman Roger Penske says its rates are capped at 2.5%-3%. He says UAG's F&I revenues last year jumped from $132.8 million to $147.7 million as its F&I per vehicle increased from $766 to $739.

“We attained 74% F&I penetration, mostly the result of increased sales at our luxury-brand dealerships,” Penske says.

No.1 volume megadealer AutoNation Inc. adopted a 100% factory-lender extended service contract policy at its nearly 300 stores. President Mike Maroone says F&I yields per vehicle sold jumped $66 to $924.

Sonic Automotive's F&I yield per vehicle for 2003 rose $55 to $879, helped largely by returns from its Massey Cadillac group, says COO Jeffrey Rachor. The group had a 70% F&I penetration and “has reduced its rate cap spread significantly,” says Rachor.

Always a strong F&I performer, Lithia Motors stood out again last year at its 79 stores, mostly in midsized markets in Western states. Lithia's $945 F&I yield per vehicle marked a new company record.

“Vehicle buyers have become very protection-minded and receptive to purchases of extended service agreements, maintenance contracts and GAP coverage,” says Lithia Chairman Sidney DeBoer.

Asbury Automotive's 100 stores boosted net F&I income for 2003 by 14.2% to $131.4 million. The per-vehicle retailed yield increased 10.9% to $816.

Based in Stamford, CT, Asbury's sales and profits advanced last year despite its failure to purchase the Bob Baker six-store group in San Diego and maintain used-car dealerships outside four Wal-Mart superstores in Houston.

“In a soft vehicle-sales climate our F&I revenues and profits per vehicle sold were at all-time highs,” says Asbury CEO Ken Gilman. “Menu selling had a lot to do with it, as did intensified sales efforts.”

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