A Career as a Car Dealership Finance Manager
For the auto industry, this is the best of times. Following 2015’s record setting auto sales, Edmunds suggests that 2016 could be another record breaking year with an estimated 17.2 million cars and trucks to be sold.1 But unless you walk into a dealership with a bag full of cash you will need a loan. This is where the automotive finance manager comes, ultimately determining if a customer receives financing and at what interest rate.
A dealership’s margins on the actual vehicle sales are quite low. For example, a Ford Fiesta car sale earns a dealership less than $500.2 So dealerships look to their F&I (finance and insurance) departments to make up the difference.
These departments, headed by the finance manager, are a major source of profitability for dealerships.
What is a finance manager?
A finance manager at an auto dealership coordinates all of the financing for customers. This financing allows customers to purchase vehicles, at least partially, on credit. But first, finance managers must assess a potential customer’s credit worthiness (mainly by viewing their FICO score) and determine an appropriate interest rate based upon their likelihood of repayment. Then, they work out the best option for the customer (and the dealership).
A finance manager is often a middleman between the car dealership and a bank or specialty finance company they use.
Additionally, the automotive finance manager is in charge of making sure all the documentation is in place for the financing. This can be rather involved and may require an administrative staff for help. The F&I department must do car title checks for trade ins, determine payoff amounts, communicate with the DMV, review sales contracts, pull credit scores, analyze all customer paperwork and work with their partner bank or specialty finance company.
Working as a Finance Manager
Dealerships view the new car buying process as three separate transactions: 1-the trade-in, 2-the new car purchase price and 3-financing. Each of these has the potential to be a profitable transaction for the dealer. The finance manager is tasked with running the financing, while the sales team handles the first two transactions. Sometimes a “deal” for the customer in one area is made up by the dealership in another.
It is significantly more profitable for the car dealership if they can arrange the financing for the vehicle in house, rather than the customer shopping for the loan themselves, elsewhere. For less credit worthy, subprime customers, in-house financing is very profitable. This results in the customer ends up paying far more for the car then the actual purchase price.
Since most subprime borrowers are focused on the monthly payments remaining low, a finance manager can gladly accommodate the customer by extending the loan’s maturity out to 7 years or more.
Of course, this adds more monthly payments but lowers the payment amount. According to a USA Today article, new car loan maturities are the longest on record, averaging 67 months.3 And almost 30% of new car buyers financed their purchase with a loan maturing between 6 and 7 years, another record.4
The F&I managers may even increase the rate they get quoted from their banks for the customer, especially with a lower credit rating. In addition to arranging the financing, a finance manager’s job also entails selling the customer as many products and services as possible, earning a commission or incentives on production. These include gap insurance, extended warranties and even paint protection.5
If you think this is shady, it’s really not anything different in how a bank makes money in a low interest rate environment.
They offer a low teaser offer such as ‘free checking’ and then have annual account maintenance fees, require larger minimum balance requirements or even charge you to view a picture of the checks you’ve written out. If you are going to work in finance, remember that these are profit maximizing entities, especially if they’re publicly traded.
Compensation for Finance Managers
The median compensation for automotive finance managers is $64,557 according to Payscale.6 But Automotive News reveals it’s actually more like $7,000 to $8,000 per month ($84,000 to $96,000 annually).7 And according to a 2012 workforce study by the National Automobile Dealers Association, the national average for an F&I manager was $118,897.8 In Texas, the average was even higher $135,491 (perhaps the lack of a state income tax provided the discretionary spending tailwind).9 As you can see, it can be a very lucrative job.
Finance managers are paid higher or less than the average based on where they are located. They are paid the most in the West South Central area of the Unites States, at 114% of the national average.10 This region covers states including Texas, Oklahoma and Louisiana. F&I managers earn the least in the East North Central region at just 87% of the average.11 This is the ‘Rust Belt’ area of the country including states like Michigan, Wisconsin and Ohio.
And finance managers that work at mass market care dealerships are paid the most, even higher than sales managers.12 This is because the margins on cars sold at these types of dealers are the thinnest, meaning the F&I managers are leaned on more heavily to produce the profit the dealership needs. As such, F&I managers in this situation can command more pay. This irks plenty of sales managers who feel they are the profit engine of the dealer, while also overseeing a team of salespeople. Adding to their ire, F&I managers job may be getting ‘easier’ with the advent of new technologies like electronic menus.
The compensation structured changed industrywide back in 2013, when the pay was almost exclusively commission-based, to the more balanced pay scale we see today.13 Today’s finance managers with a mix of commission, incentives and base salary and more time off.14
Before the compensation shift, finance managers earned more.15 But of course, this number presumably assumed ‘good times’ for the industry because solely commission-based salaries are often quite cyclical. They also worked considerably more hours. But even if the pay used to be better, no one likes working marathon work weeks. “… we’ve got happier people because they’re not working 80 hours per week anymore” confessed James Seale, General Manager of Southwest Kia in Mesquite, Texas.16 The new compensation has helped make dealerships more profitable, leading to more job security for finance managers.
How do I Become a Car Dealership Finance Manager?
To become a finance manager, you will need a bachelor’s degree and basic financial knowledge of lending. Working in coordination with the sales department, you will be offering various financing and service options, including variable interest rates and rebates. A Masters of Finance degree would also help separate you from the competition. But nothing beats experience in the auto industry.
If you’re having trouble getting landing a finance manager position, try working at a dealership in a sales role first. There are many dealerships that will promote sales personnel to the F&I department.17 Today, these are younger, hungry college educated employees (who the dealership knows don’t remember what the compensation was like prior to 2013).
Mike Poskey of Dallas consulting firm ZeroRisk HR, suggests dealerships hire finance managers from retail banking.18 If you are working as a retail banker and aren’t being compensated to your satisfaction, consider the services of a headhunter to see if you can get into a dealership. Working at a community bank may not be very lucrative depending on the zip code of the client base. And the hustle and bustle of a weekend F&I department will certainly be faster paced and more exciting. But of course, you will likely work significantly more hours. Not too many finance jobs can beat retail banker hours.
Keep in Mind
This is a golden era for finance managers and car dealerships driven by extremely low interest rates and easy credit. But it should be noted that car dealerships and F&I managers have benefitted from the securitization market and the proliferation of asset backed securities or ABS. Auto loan ABS are investable securities backed by pools of consumer auto loans. It is these car payments that are the cash flow or interest the investor receives. The ABS market has absolutely skyrocketed in the low interest rate environment since these ABS offer a higher rate of interest than the overall stock market or comparable bonds.
As long as there is demand from investors, the auto loan market shows little sign of slowing down. But if this were to experience a similar credit crunch like in 2008 that dampens investor enthusiasm for ABS, it would severely strain the F&I managers ability to extend credit, resulting in less deals and less compensation. There have been some recent warning signs though as delinquencies on loan repayments have increased. Even JP Morgan CEO Jamie Dimon admitted the auto loan market appeared “stretched” and that “somebody is going to get hurt.”19