Finance Reserve Good News – Bad News
Q. Do I have to disclose finance reserve to the buyer?
A. At present you do not have to disclose finance reserve profit to the buyer. However, this is a fairly hot legislative issue and state associations are exercising due vigilance to protect this aspect of the business.
While earning finance reserve is still a legal and profitable endeavor, misrepresenting the nature of interest rates is not. Making false statements during sales negotiations and/or the F&I process creates liability for the dealership. You need to make sure your sales personnel and F&I producers understand that this is an area in which both what they do say and what they don’t say are equally important.
Here are some guidelines.
Don’t say – You won’t be able to get a better rate. Instead say – This is the rate we are prepared to offer you today. You are always free to seek your own financing. Please bear in mind that we need to be funded by _________.
Don’t say – We can’t give you any better rate than this. Instead say – A lower rate just doesn’t make sense to us right now.
Don’t say – This is the best interest rate available. – Instead say – You will find that our rates are very competitive.
Don’t say – The rate just comes out of the computer. – Instead say – We sell our loans to various lenders who compete for our business.
Remember that some of your customers will have less than stellar credit scores, and the deal structure may require that you work with specialized non-prime lenders, whose rates are generally higher than those offered through prime-time lenders.
Also, as a result of recent class action lawsuits, many national lenders have instituted new policies regarding dealership participation. In California for example, lenders have mutually agreed to provide a maximum of 3 points for reserve participation regardless of the buy rate. This action was in response to an attempt by legislators to eliminate predatory lending practices.
The bad news is that the days of living on reserve are long gone. The good news is the opportunity you have to increase revenue through the sale of other products – a practice that also makes it easier for your customers to return often to upgrade their vehicles.
Kelly’s Korner, OIADA Newsletter, November 2003, p.11