Flat fees that are 1 to 3 percent of the loan amount can reap as much or more profit than an interest rate markup, says Gary Allgeier, finance director at the Suburban Collection, a large, multifranchise dealership group headquartered in suburban Detroit.
Many of the group's customers fall into the top credit tiers and qualify for the best retail interest rates. If Suburban's stores charge a hefty markup, Allgeier says, they risk losing the financing.
The dealership group works with lenders that typically cap rate markups at 2.5 percentage points, Allgeier says. But, he says, it is nearly impossible to obtain the maximum. Most often, the markup is just half a percent, he estimates.
Here is how Allgeier says a super flat would stack up against a markup on a 60-month car loan for $20,000, assuming that 20 percent of the amount the dealer makes by marking up the interest rate is applied to losses that occur when the borrower defaults, cancels or repays early:
-- A maximum 2.5 percent markup earns the dealership $1,071, but a more realistic 0.5 percent markup yields a $215 dealer profit.
-- A super flat of 1 percent of the loan amount nets the dealership $200; a super flat of 2 percent of the loan nets $400. None of the finance profit is applied toward defaults, cancellations or early payment.
Suburban Collection finished No. 13 on the Automotive News list of top U.S. dealership groups in 2009, with 20,337 new retail deliveries.