A Cause For Concern For Dealers Who Over-Rely On F&I Income

June 23, 2014

I’ve been struck by a couple trends emanating from dealer F&I offices:

1. Loans are longer. A recent Automotive News report noted that the average length of a car loan runs 66 months, the highest on record for Experian, which tracks the data. In addition, the report calls 72-month loans the “new normal,” and loans ranging from 73 to 84 months saw a sharp rise this year, accounting for nearly 25 percent of all new-car loans.

2. Customers are carrying more car-related debt. A recent TransUnion report shows a steady climb in the average amount of debt customers carry in their vehicle loans for the past three years. The increase appears to owe to factors like customers buying “more car” and carrying over unpaid balances from other vehicle loans. For the moment, customers are able to absorb this additional debt by stretching loan terms to make monthly payments more affordable.

3. Dealers are making lots of F&I money. The Automotive News report shows double-digit gains in F&I/car revenues for top dealer groups, with the top 10 groups averaging nearly $1700 or more per vehicle. The increases aren’t surprising, given the increased emphasis dealers place on F&I income as front-end margins face continued pressure.

4. Everybody’s buoyant. The reports quote dealers, financial company analysts and executives offering an optimistic view of current conditions. Risk factors like delinquencies, factory production levels and portfolio oversight are currently in balance. “There is good discipline across the industry,” one executive says in the Automotive News report.

Taken together, the trends make everyone a winner, which leaves me wondering how long the ride can or will last—and what specific market volatility might make the good times go away.

My biggest concern goes for dealers who have come to over-rely on F&I income for their storewide profitability. Typically, these dealers haven’t focused fully on increasing efficiencies—and margin performance—in their new and used vehicle departments. For them, making more in F&I has been the path of least resistance to increase profitability.

The problem, of course, is that this F&I-dominated strategy seems to rest on a shaky, phantom-like foundation; if any one of the aforementioned risk factors falls out of balance, or a new risk emerges (e.g., rising oil prices), the F&I-reliant dealers will likely find themselves in a tough spot.

First, they’ll see their principal source of profitability diminish due to factors beyond their control and, second, the weight of the untended inefficiencies in other dealership departments will hamper their ability to make up the difference.

Of course, I’m not worried at all about Velocity dealers. Their efficiency-driven and department-diversified profit streams will continue to yield positive results, even if times aren’t as flush in F&I.