As I write this article, I have just read that inventory of new vehicles in the U.S. has gone north of an 80-day supply. That is quite a change from just over a year ago. It seems that the market has changed a bit and that for now, supply is starting to exceed demand. Add to the equation inflation and an increase in interest rates, along with consumers having to stretch the budget to afford a new car, and it is no wonder dealerships are having to work a bit harder for every deal these days. Front-end gross profit per deal is shrinking from the record-setting levels of the past couple of years, and dealerships are once again starting to rely more on F&I contribution to overall profitability.
Based on these market trends, now may be a good time to be proactive in focusing on improving deal structure to ensure you are optimizing the profitability of every deal.
When building any structure, starting with a solid foundation is essential. There are four components to a good foundation in deal structure: communication, lender awareness, the right vehicle, and equity.
Keep in mind that although lenders have always focused on limiting risk with every loan they consider, what has taken place in the market over the past couple of years has made that focus even more acute.
The more insight you have into how your lenders evaluate risk, the better you can structure a deal into one that a lender can approve, the dealer can approve, and the customer can approve.
The first step to improve deal structure is communication. When sales and F&I work together and look at each holistically, deal structure improves. Instead of just looking for a yes, when working together they often find the best yes. Working together to look for the profit opportunities on every deal, with each customer, and with each vehicle is where good deal structure begins. Granted, front gross trumps F&I gross. However, there are some deals for which front gross may not be optimizable but back-end gross can be. Recognizing those deals and optimizing them can be the difference between an average month and a great month.
Lender awareness is about knowing how each lender evaluates a deal to determine the risk it is willing or not willing to accept. This understanding of your lenders is essential to deal structure and can lead to more approvals.
Every deal for a lender is an equation to determine risk. The big three for most lenders are payment-to-income ratio, debt-to-income ratio and loan-to-value ratio. Certainly, the customer’s credit profile contributes to the risk evaluation, but that being neutral, the above three must be in line with the lender’s guidelines to obtain a conditional or automatic approval. Knowing where the lender has leeway and what the non-negotiables are can ensure you are submitting a deal that is structured for a higher probability of approval.
For example, a lender that has given you a payment cap may be willing to exceed that cap in exchange for a shorter term. Less term equals less risk. However, the same lender may not budge on its loan-to-value cap. The point is that when you look at the structure of a deal from a lender’s perspective, as well as from your own, structure improves.
Next is the collateral. The right vehicle can be a major contributor to good deal structure and can be the difference between, as I mentioned, just a yes to a deal, or the best yes to a deal. Knowing the inventory and having the ability to show value points in multiple vehicles with similar features during the selection process can pay dividends if you need to change collateral to optimize a deal. Having a plan B that allows the customer to stay in the deal is important.
And lastly, nothing changes the risk profile of a deal like cash. In most situations, cash is king, and deal structure is no different. Cash-down benefits all parties to the deal. Begin by asking for a percentage of the purchase price. Start at 20%, and go from there. Creating good deal structure is worth the time and effort. When mastered, it will get you more deals and more gross profit.
John Tabar serves as executive director of training for Brown & Brown.
