Interest Rate Profit
- Often, dealers will take a small deal on the “Front-End,” knowing that they will generate this income on the “Back-End.” The main factor in the “F&I” department’s profitability is the interest rate (or the Money-Factor on a lease contract). During the earlier negotiation, the “Desk” will almost always calculate the customer’s payment with an interest rate or money-factor that is higher than the dealer’s rate (the Buy-Rate).
This provides the “F&I” manager with a “Leg” in the payment that will help him sell products and services. Alternatively, this higher rate can be used as pure profit for the dealer. If the “F&I” manager uses the rate as pure profit (Finance-Reserve), he will run the risk of having to refund it back to the bank if the customer pays off the loan early. For example, the “F&I” manager receives $1,000 in profit from the rate and then one month later the customer pays off the loan in cash. The dealer will then have to refund that $1,000 profit. Sometimes, they will make the deal and then instruct the customer not to pay off the loan, insuring that they receive this pure profit from the rate. This is illegal. Dealers cannot make the deal contingent on the customer using their financing.
The “rate” (finance-reserve) income works the same way on a lease agreement, except that instead of the dealer making its profit from the interest rate, it makes it from the money-factor. These “back-end” profits from leases can be massive, especially on more expensive vehicles. Keep in mind that on a lease, the dealer does not disclose the money-factor and is not required to refund the finance-reserve if the customer pays off the lease early.
Example of dealer profit (Finance-Reserve) created from the interest rate.
Example of dealer profit (Finance Reserve) created from the money-factor.