Dealers' choice: Giving customers great loans upfront or getting in on the refinance action
Brian Benstock of Paragon Honda and Paragon Acura in New York says his stores keep customers happy by giving them competitive rates upfront.
If auto loan refinancing isn't on your dealership's radar, it may be time to put it there.
The gathering elements of historically low interest rates, auto owners searching out lower monthly payments and lenders scrambling for business could converge to bury unprepared dealerships under a pile of reserve chargebacks.
Although dealerships aren't seeing a lot of vehicle refinancing yet, a number are standing guard. They're also taking more measures to make sure they retain these customers, including partnering with an auto refinancing company.
There are no readily available industry data that track refinancing volume. Nevertheless, "you know it happens and you know it's out there," says Melinda Zabritski, director of Automotive Credit for Experian Automotive. "There are big pockets of customers who can move down to lower rates," she says, referring to near-prime customers who could only get subprime financing in 2009-10.
Online lender OpenRoad Lending, which gets roughly half its business from auto loan refinancing, has seen about a 15 percent rise in refinancing applications and overall loan volume this year, says CEO Chris Goodman.
Although credit is improving, he says, people "don't want to buy new vehicles and gobble up more" money. The average model year his company is funding is 2009, he says.
Since customers rarely give warning that they're refinancing, dealers tend to learn about it through finance reserve chargebacks. Ouch.
Dealerships trying to save these customer relationships seem to be divided into two camps: beat 'em or join 'em. Either they're making customers attractive offers they won't want to give up or they're getting in on the refinancing action.
At Langdale Ford in Valdosta, Ga., Finance Director Marvin Eleazer's goal is to see no refinancing at all. "If we see one a month, I get rather irritated," he says.
That's because in addition to losing credibility with customers, Eleazer says, you typically lose their F&I products business, too, since they often opt for cheaper -- though often inferior -- coverage offered through their new lending source. Getting hit with a $700 to $800 reserve chargeback and having to refund $600 on a service contract and $400 on a GAP policy gets kind of pricey, Eleazer says.
Although Langdale Ford has not seen an uptick in refinancing lately, he says, "It's always on the horizon." Several years ago, the mid-sized single-point dealership was seeing two to three refinancings each month. "We spent time finding out the root cause, took control and made serious decisions with rate administration," Eleazer says. His department now tries to hover within 100 basis points of the assigned rate and focus more on products and solutions than rate reserve.
Haddad Motor Group of Pittsfield, Mass., uses a couple of strategies to keep finance reserve chargebacks to a minimum, says F&I Director Chris Cochran. The dealership's pay plan encourages finance people to make money on products, not reserve. The group also keeps its finance rates lower than the local credit union, which, Cochran says, has been advertising at 2.99 percent for at least a year.
Brian Benstock, general manager of Paragon Honda and Paragon Acura in the New York borough of Queens, says he has observed an uptick in refinancing options in the market this year but says refunding finance reserve isn't something Paragon encounters often. He credits giving customers very competitive rates upfront and then continuing to educate them about their options.
Paragon lays out for customers, side by side, the costs of refinancing their existing car, purchasing a new car with similar features and buying a pre-owned car with similar features.
Although refinancing's low rates may look very attractive, the store explains to customers that an older car typically depreciates much quicker than its loan will be paid off, which could keep them in the vehicle longer than they'd like or put them in a negative-equity position.
"The customer then has a clear picture of what every scenario is and the benefits of each, and we are happy to help them with any of the three options," Benstock says.
Paragon, which has a team dedicated to analyzing the portfolio of each customer, reaches out to them when they enter an equity position on their current vehicle. More often than not, customers opt for a new model for a lower monthly payment and with no money out of pocket.
"In the grand scheme of things, it is a win-win situation for both the customer and Paragon," Benstock says.
"We desperately need qualified pre-owned cars, and they are happy to drive a newer car for the same or less a month."
Antonino Automotive Group of Connecticut is taking a different approach to refinancing. Through its affiliation with Auto Refi Now, a loan matching service for dealers and auto consumers, it's able to legally process refinance applications.
On average, the group helps 10 customers per month refinance at each of its nine dealerships says Justin Hoopman, general manager of the Girard Ford store in Norwich. That's not counting new vehicles purchased by customers who come into the dealership through Auto Refi Now.
"It's a growth machine for us," says Hoopman, who says Auto Refi Now makes it easy to farm leads and bring customers back to the dealership to re-evaluate their needs.
Auto Refi Now enables a loan refinancing to be processed at the dealership through software menu systems that tie into dealership management systems.
Dealers must use Auto Refi Now's preferred lenders, says President Spencer Walters, a former dealership finance manager. Greenwood Credit Union of Warwick, R.I., has been its main funding source over the past nine months, he says.
Walters says average dealer profit on a refinancing is about $1,000, with the majority of this coming from the sale of GAP insurance.
It is a benefit being able to mention refinancing in the dealership's newspaper ads, says Hoopman. "It's an advantage to us and an advantage to the customer."