Surviving the Roller Coaster Ride

No doubt, many finance offices feel like they’ve been on a bit of a roller coaster ride over the past 11 months, with finance companies tightening their belts, exiting the subprime sector, exiting leasing, dropping dealers or closing their doors. The 5th Annual Auto Finance Survey, conducted by Auto Dealer Monthly (ADM), provided a snapshot into both franchise and independent F&I offices in 2008.

After analyzing the data, it turns out that, while some things in the F&I office have changed when compared to last year’s results, others haven’t changed much at all. One significant change was in the average F&I income per retailed unit for franchise and independent dealers, both reporting a decrease compared to last year’s survey results—a $65 per-unit decrease for franchise and $174 per-unit decrease for independents.

Overall, a slight majority (38 percent) of dealers felt this year has been a “worse” year than 2007, regarding income generated in the finance office. While 36 percent felt it was “about the same as last year,” 22 percent thought it was “better.” Four percent of respondents said their F&I income was “much better” this year, and no one felt it was “much worse.”

Prime Finance

For the third consecutive year, J.P. Morgan Chase topped the franchise dealer list of preferred non-captive prime finance companies with 25.9 percent of the market share. The companies consistent buying has obviously kept it at the top of finance offices lists. Wachovia came in at 2nd place, with 23.4 percent, and Bank of America grabbed 3rd with 17.2 percent.

Altogether, the Top 10 Non-Captive Prime Finance Companies captured 33 percent of the franchise dealer prime market. Captives (48 percent) and local credit unions and banks (19 percent) captured the remaining 67 percent. The top three captives listed this year, respectively, were Toyota Financial Services, GMAC and Ford Motor Credit.

In the prime finance segment of the survey, independent dealers always respond a little differently, partially because they do not have access to captives and partially because some financial institutions only work with franchise dealers. Local credit unions and local banks always claim a large portion of the independent prime market. This year, they claimed an overwhelming portion with 54 percent of the market share, an astounding 39.4 percent increase over last year’s survey results.

Local banks claimed 2nd place for independents with 12.4 percent of the market—up from 9 percent last year. J.P Morgan Chase was a favorite among independents as well, placing 3rd place on the independent list of preferred prime sources.

When analyzing the lowest credit score financed with a prime finance company, franchise dealers, on average, reported a 7-point increase (reporting the lowest score financed by a prime finance company in ‘08 is a 585, compared to 578 in ‘07). Interestingly, in the same category, independents averaged the exact same figure as last year (566).


Special Finance
In this particular market, much has changed in the past year. Many deals that would have been snatched up by multiple finance companies last year are automatic turndowns this year. Indicative of an unstable economy, subprime finance companies have been cutting back on financing and are more selective regarding the people and vehicles they’re financing.


Independents, which typically have less access to finance sources than their franchise counterparts, now have even fewer resources because some finance companies have stopped working with independents altogether and some have suspended adding independent dealers to their dealer base indefinitely.

You might notice the special finance data displayed a little differently this year. Previously, Auto Dealer Monthly simply listed the top special finance sources for the calendar year. Because the special finance market has been changing so rapidly, ADM asked respondents this year to list their top special finance companies based on the past 90 days.

Also, to give dealers a better idea of exactly where special finance companies’ sweet spots are, the SF section is further broken down by credit tier this year. The four credit tiers are based on credit scores. Tier One represents the credit score range 620 to 581, Tier Two: 580 to 541, Tier Three: 540 to 501, and Tier Four: 500 to zero.

In Tier One, Wachovia was the frontrunner with 16.4 percent of the market share. Wachovia also broke into the top eight listed finance companies in Tier Two at 2nd place with 12.4 percent of the market share and in Tier Three at fifth place with 9.1 percent of the market share.

Atop Tier Two was Capital One, with only 0.2 percent more market share than second-place Wachovia. Capital One was also a frontrunner in Tiers One (2nd place) and Three (3rd place), making the company a major player in the credit score range 620 to 501. Scott Power, special finance manager at Guess Motors, said, “In the last 90 days, Capital One has probably captured 50 percent of our business, especially deals with credit scores in the 501 to 540 range.” He also likes that Capital One will still finance a vehicle that is seven years old or newer for 72-month terms.

Chase Custom, J.P. Morgan Chase’s subprime division, was in the top three in all four tiers—a feat that no other company achieved. Chase Custom captured 1st place in Tier Three, 2nd place in Tier Four and 3rd place in Tiers One and Two.


Military Finance
While military personnel account for a small percentage of most dealers’ sales, about 6 percent of dealers reported that military sales make up 15 to 20 percent of their total sales. No dealers reported military sales accounting for more than 20 percent of total sales.


About 7 percent of dealers said military sales account for 10 percent of their sales and just over 87 percent of dealers said military sales account for 5 percent or less of their total sales.

For franchise dealers, the military segment was well-served by captives, but for independent dealers, one company captured an overwhelming percentage – over 75 percent – of the market share: Dealers’ Financial Services. Specifically, it is their MILES program that serves this niche.

The remaining 25 percent of the market share for military finance sources for independent dealers was comprised of Security National Automotive Acceptance Corp. (SNAAC), claiming 19 percent, and local credit unions and banks, accounting for the remaining 6 percent.


Other Statistical Data
 In almost every category – for both franchise and independents – product penetration was down from the previous year. While in most declining categories, the decrease was slight, but there were a few notable dips. For franchise dealers, the SF service contract product penetration dropped to 37 percent, compared from 46 percent the previous year.


Independents saw declines in the special finance and used vehicle service contract categories and the GAP categories. After seeing an increase in 2007, both GAP and used vehicles service contract product penetration dropped back to their 2006 levels.

Many dealers have implemented menu selling in the F&I office to help with compliance, but it can also help with F&I sales by ensuring all products are offered to customers. According to the survey results, a much higher percentage of franchise dealers (85 percent) use menu presentations when compared to independents (21 percent). Of those franchise dealers that use menu selling in the F&I office, 61 percent use an electronic system, and of those independents using menu selling, 20 percent use an electronic system.

Over the years, a technological advancement that has helped streamline the financing process is electronic application submission. At least one of three major providers of the service – DealerTrack, RouteOne and Finance Express – are used by just over 86 percent of survey respondents, and over half of the respondents use two of the three.

Vol.5, Issue 11