For years, auto dealers made money in the finance office by marking up the interest rate on car loans.
But a relatively new finance practice that started with credit unions is gathering steam. Fifth Third Bank, a pioneer of the method, calls it a power flat program.
"We think this is the future," says Kaari Link, national accounts manager for Fifth Third. "Other lenders are offering the dealer a choice between a markup and a flat fee. In our new markets, the power flat is the only choice."
The power flat or super flat, as some call it, is a flat fee of 1 to 3 percent of the amount financed. It typically is higher than the traditional $100 to $150 the lender pays a dealership as an alternative to a rate markup. On a $20,000 loan, a 1 percent flat yields a $200 payment to the retailer.
Without a markup, the customer receives a highly competitive interest rate. And with a healthier flat fee, the dealership also benefits, some dealers believe.
"The super flat does two things," says Jim Farley, lender relations director for Van Tuyl Group, the nation's largest privately held dealership group. "It gives the dealership F&I income and a competitive rate you can pass to the customer."
Going with a super flat reduces the likelihood that the customer will refinance, Farley says. The resulting monthly payment is lower, allowing the dealership to sell the customer more aftermarket products such as vehicle service contracts or tire and wheel protection.
He also says the auto finance business is so competitive these days that it is difficult to profit from rate markups. In some cases the power flat is more profitable than the markup.