Few car dealerships display signs like “Acme Chevrolet & Insurance.” But many dealers get much of their profit from insurance and insurance-like products sold to customers who buy not only cars but protection against everything from a car thief to a blown transmission.
The opportunity to purchase protection against mechanical problems, theft, maintenance costs and even faulty paint and flat tires ordinarily comes at the end of the vehicle-shopping process, in a room dealers call the finance-and-insurance (F&I) office. By then, shoppers likely have done considerable test-driving and haggling, and probably aren't prepared to evaluate financial products, says John Van Alst, a staff attorney with the National Consumer Law Center, a legal advocacy group for low-income people. Many shoppers focus solely on buying a car, "and that’s where they have to watch out,” Van Alst says.
What they have to watch out for is buying F&I products they don’t need or paying too much for the ones they buy. F&I magazine reported that in the first nine months of 2011, dealers made $800 per new vehicle from F&I products. That $800 profit can exceed what a dealer makes on the sale of the vehicle itself, according to Jeremy Bowler, senior director of the insurance practice at marketing research giant J.D. Power and Associates. At car dealerships, "the finance manager is often one of the greatest profit centers,” Bowler says.
F&I products often resemble insurance or are backed by insurance, but they aren’t always regulated like insurance, Van Alst warns. For instance, he says, one major seller of F&I products to dealerships advertises payout rates -- the percentage of customer premiums eventually paid in the form of claims -- of just 12 percent. By comparison, regulators require payout rates of more than 70 percent on most types of insurance.
The combination of a tired, distracted shopper and unregulated or lightly regulated products can makes F&I offices hazardous to your wallet, Van Alst says. “Consumers have to be really vigilant,” he says.
The F&I lineup
A car shopper seated in a finance-and-insurance office typically will be presented first with an opportunity to borrow money for the purchase through a lender arranged by the dealer. Then, an array of insurance or insurance-style products will be recommended, including:
- Service contracts, which let consumer pay a one-time fee to cover future maintenance and repairs. The size of the fee varies by whether the contract covers only major drivetrain components like the engine and transmission, or is so-called bumper-to-bumper coverage of electrical and other systems. Drivetrain coverage may be as little as $500, while bumper-to-bumper coverage could cost $2,000 to $3,000 or more.
- Guaranteed auto protection (GAP) coverage. This insurance covers any unpaid loan balance if the car is totaled and its value is less than what's owed. Let's say you owe $20,000 on a loan for car with a depreciated value of $15,000. If the car is totaled and your deductible is $1,000, your insurance provider will pay $14,000 if you have optional collision coverage, leaving you owing $6,000 for a car you no longer have. GAP coverage insures against this risk. A dealer F&I office may charge you $500 for GAP coverage.
- Theft prevention. This includes window etching, remote ignition cutoffs and vehicle tracking systems.
- Credit life insurance. This pays off the balance on an outstanding loan if the borrower dies.
- Credit disability insurance. This helps a buyer make car payments if the buyer becomes disabled.
- Protection against flat tires, broken windshields and lost keys.
Credit life and credit disability used to be the biggest sellers in F&I offices, purchased by at least half of all shoppers. However, those two products been subjected to tighter regulation, with the result being that fewer than 16 percent of shoppers bought them during the first nine months of 2011, according to F&I magazine.
State insurance departments are the main regulators of F&I products. The regulations vary by state, and the patchwork of rules can be confusing. One important consideration is whether a given F&I product is subject to insurance regulations.
Pricing also varies. As a rule, dealership F&I offices aren't bargain basements, according to Phil Reed, senior consumer advice editor for automotive website Edmunds.com. “Except for the extended warranty, most of these products are available elsewhere, usually at lower prices,” Reed says.
To get through F&I office in good shape, here’s what you should do:
- Be prepared. Realize that you’re going to be confronted by a senior salesman who makes his livelihood hawking these unfamiliar products, Reed says.
- Call ahead to third-party warranty providers and your own insurance agent to get quotes for any coverage you might want to buy for your new ride.
- In the F&I office, demand an explanation if you don't understand something. If you want a lower price for a product, ask for one. There’s nothing wrong with saying, “This is more than I want to pay. Can you configure it differently? Can you price it differently?”
- Avoid buying something you don’t need. A new car with a 10-year, 100,000-mile manufacturer’s warranty on major components probably doesn’t require an extended service contract. Service contracts cover only those items that don't fall under a manufacturer's warranty.
- Consider your car’s age and your plans for it. You may want to insure against a blown engine in an older car, for instance, while passing on protection against, say, broken power locks.
- Don’t assume you need GAP insurance. If you put up a large down payment and don’t roll a sizable unpaid balance on the trade-in vehicle into a new loan, you probably don’t need GAP. “If they’re trying to sell you GAP, there’s an assumption that you’re going to owe more than the car is actually worth,” Van Alst says.