Why Offering Financing as a New or Used Car Dealer is an Essential Part of Success
By: Web Finance Direct
To offer financing as a used car dealer can give your business a leg up on your competition. Purchasing a new or used vehicle, boat, or RV is both exciting and daunting for consumers, who will want to get the best deal possible. Over half of all U.S. consumers choose to finance their used car purchases, while nearly 85% finance their new car purchases. Whether you’re able to offer in-house financing or choose to work with finance and insurance companies for car dealers, the benefits could take your business to the next level.
So, how can you offer financing as a used car dealer? And how do dealerships make money on financing? Let’s break it down.
In-House vs. Working with an F&I Services Company
The first question to ask when deciding how to offer financing as a used car dealer is whether to offer financing in-house or through an F&I services company.
How Does In-House Financing Work?
To be able to offer in-house financing can increase revenue generated from interest, but would require you to take on more risk as it is your business’s money being lent to buyers. When offering in-house financing as a used car dealer, everything is done at the dealership or online. When customers find the car they’d like to purchase, they apply for their loans and negotiate prices and interest with the dealership. Carvana is a great example of this practice in motion.
Often referred to as “buy here, pay here”, a big pro of in-house financing for customers is that the process tends to be very fast. Once approved, their loan funds are ready to be spent and they can drive their car off the lot during the first visit. From the business perspective, eliminating the need for finance companies for car dealers can help give your dealership more flexibility when it comes to setting rates, determining who qualifies for your loans, and even deciding whether to require down payments.
Offering Financing Through Web Finance Direct
Offering financing as a used car dealer can be tough at first. Partnering with an F&I services company is great for small businesses and dealerships looking to expand their customer base. This form of lending is a partnership between an intermediary and a network of finance companies for car dealers, like credit unions and banks. The F&I company assists with the sourcing of loans on behalf of consumers through its relationships with banks and credit unions. Once a customer’s loan is processed and approved, the sale is completed and the dealership will earn either a flat fee for selling the loan or a percentage of the loan amount and interest. The total amount earned per sale can vary depending on the price of the car and other products sold.
Working with an F&I Services company has a lot of benefits. For one, it can help expand your dealership’s consumer base, giving you access to a wider range of borrowers looking for their next car. Equally as important, though, it helps your dealership remain competitive in today’s market. This is where Web Finance Direct comes into play. By connecting you to our diverse network of lenders, Web Finance Direct can help your dealership provide customers with a top-tier financial service, elevating profits and giving you access to our dedicated team of experts.
How Car Dealerships Make Money On Financing
So, do dealerships really make money on financing? Yes, especially in the long run. While your business may not make a fortune right away, offering financing as a used car dealer is an essential part of growth and success in the marketplace. A major benefit to financing is that it helps give your customers more flexible spending power. By working with finance companies for car dealers or offering in-house financing, your business will be more strongly positioned to attract buyers who are looking for their next vehicle.
Traditionally, dealerships make money on financing by adding an additional percentage to the offered interest rate. For example, if a bank offers a 5% interest rate, or “buy rate”, a dealership would typically add on another 1-3%, known as the “sell rate.” By pocketing the additional percentage as a fee for their service, dealerships are able to make more money over time as they sell loans. When deciding how to offer financing as a used car dealer, it is important to keep in mind that dealerships may also be able to negotiate flat fees with banks and credit unions for selling their loans.
Another way dealerships could increase revenue is by offering 0% financing when consumers are less likely to buy cars. This form of financing won’t bring in any money from interest payments but could help your dealership sell more expensive car models that most buyers would normally steer away from.
Finally, when offering financing as a used or new car dealership, another way to make money is by offering back-end services. After a customer purchases their vehicle, they are usually offered additional warranties, maintenance plans, and insurances. Gap insurance, for example, gives customers the option to pay an extra cost on top of their loan to insure their car in the event it is totaled or badly damaged before fully paid off. Many times, the profit margins a dealership makes on back-end sales far exceed the front-end margins.
How do dealers make money by offering financing to their customers?
Apart from the sales themselves, offering financing as a used or new car dealership is a great way to earn money from flat fees or percentages of interest. By providing in-house financing or working with F&I services companies for car dealers, your dealership will be more competitive in trying to attract potential buyers.
Why do dealerships want to offer financing?
Offering financing as a used car dealer is a key part of success in today’s market. Because customers are looking for the best deals, the ability to offer competitive financing options will help keep business strong and attract more borrowers.
How do car dealerships make money on 0-down financing?
While it would seem at first like 0-down financing won’t make your dealership any money, it’s actually a great way to grow your business during periods when consumers are less likely to make purchases. Additionally, it may drive your customers towards more expensive models they wouldn’t normally purchase, leading to higher profits in the long term. Keep this in mind when formulating how to offer financing through your dealership.