Category: F&I Products

Life (Credit Life) without Recursion

I was chatting with Tim Gill the other day about auto finance math, and the topic of recursion came up.   Tim is one of the few vendors in this space with his own “calculations engine.”  Otherwise, there are not many people who will talk to me about esoteric math problems.  That’s why I write a blog.

People commonly describe Credit Life as a recursive calculation or, more properly, an iterative one.  This is because the premium must cover the amount financed, and the premium is itself financed.  So, if we write the premium as CLP, a function of the amount financed, A, then:

Fig1This is generally how people solve it.  They run a few iterations, and CLP converges quickly.  This is a preference, however, not a requirement.  Assuming that the premium calculation is distributive over addition, which it is, we can just as easily set the problem up as:

Fig2… which can be solved analytically.  This approach will work for most of your popular recursive calculations, like GAP insurance.  For an example, let’s take a typical “cost per thousand” insurance calculation, where f works out to ten percent.  You could go the infinite series route, which looks like this:

Fig3

Or, you could simply work the algebra problem:

Fig4Now, I know what you’re thinking.  You’re thinking that credit life calculations are far too complicated for this approach.  You may also be thinking that the premium is based on the monthly payment, M, not A.  In fact, these complaints are related.  The payment is directly related to the amount financed, through the PV annuity factor, which combines the term and the APR into this handy relation:

Fig5

So, when you see a payment formula like this one:

Fig6The insurance carrier is actually helping you, by combining the calculations for premium and monthly payment.  By the way, the last time I checked, C# did not have the payment and related methods from VB and Excel.  You are much better off coding your own PV annuity factor, and using it as described here.

Now, if you are designing a calculations engine, you may still prefer to use iteration, for the same reason that you may not want to algebraically reverse all your tax and fee calculations.  It is better, though, to use your algebra and know your options, than to rely blindly on iteration.

Six Month Term Bump for Menu Selling

Whenever I design a menu system, I always include a second finance term that defaults to the base term plus six months. When I did the first menu system for AutoNation, I was coached on this by Arthur Knosala who learned it, I believe, at JM&A.

We had an object lesson when I was working on Route One’s menu. The team was just getting into this requirement when the product owner happened to buy a new car, and took the term bump. She was able to maintain the agreed payment, and still buy some good products.  Even a three-month bump is significant.

My spreadsheet, below, shows how this works. The idea is to goal-seek the amount of product that maintains the original monthly payment, at the longer term. The input values are blue. Everything else is calculated. This allows the possibility that the APR may be higher with the longer term.

Term Bump

If your menu system won’t do this, you can download my spreadsheet. It automatically calculates the finance amount which, with the term bump, results in the same payment. Remember, only type in the blue cells.

Magic tricks are easy once you know the secret — Marshall Brodien

When I was at MenuVantage, one of the guys put together a demo in which he used the term bump to sell a raft of products, and then a biweekly payment program to ratchet the term back down.  It was like a magic trick.  Same payment, same term, and presto!  He pulls two thousand dollars’  gross out of his sleeve.  Dealers couldn’t sign up fast enough.

Lenders Outsource Forms Management

About a year ago, I did an informal survey of F&I product providers.  They were, and still are, moving toward a service-oriented architecture that prints forms and originates contracts online.  For providers who do not have a forms service, Provider Exchange Network will host forms at a nominal charge.  We offer this as a convenience, even though providers are moving away from it.

Lenders, however, are not moving in this direction.  This is mainly due to stricter regulation of finance contracts, and also the disparate experiences of the two groups.  In the late nineties, finance sources – both captive and independent – developed online credit systems. They subsequently moved to aggregators like Dealer Track, and many single-lender systems shut down.

So, while product providers have retained their online systems, and support their own services for e-contracting, most lenders do not.  This is why my colleagues in Lender Services are busy loading their forms library, while we are unloading ours.

Which Admin System Are You Running?

Thanks to the people who responded to my query on Linked-In.  I am still learning about the systems used by my customers in the vehicle service contract (VSC) market.  Most, it seems, have homegrown AS/400 systems.  I have also gotten referrals for Sirius and Stone Eagle.  Please comment here, and tell me what system you are running, whether COTS or custom, and what the platform is.  Thank you.

Selling F&I Products in the Service Lane

Automotive News reports the success AutoNation is having, selling F&I products in the service lane.  I thought MenuVantage dominated service-lane selling, and I was dismayed to see AutoNation using a different system.  I am not with MenuVantage anymore but – old rivalries die hard.

What caught my eye was the point about service-lane buyers needing a way to finance their service contracts.  I have a few words to say on this point – Service Payment Plan.  My pal Bob Hymen offers zero percent financing, and a complete selling kit for the service lane.

Service Payment Plan is integrated with a number of menu systems including MenuVantage.  The F&I Manager can create a finance contract for any of the leading providers, as shown here:

After that, the system prompts for a credit card or bank account, and then generates all the required paperwork.

Providers Keeping Their Forms

I have been polling my friends in the F&I Products industry, to hear their thoughts on DSP integration.  In general, they report obstacles at the dealer level and lower volumes than anticipated. The growth in web services continues, of course, with scattered outbreaks of SOA.

What I mainly wanted to hear about was forms management.  GE was the first, in my recollection, to provide completed contracts using their own web service – and this is now the trend.  It seems increasingly unlikely that providers will hand their forms over for administration by a DSP.

Provider Network Expands

PEN-LogoI recently attended the F&I Conference in Orlando, where I spoke with leaders of Open Dealer Exchange (ODE), ADP and Reynolds’ joint venture for credit aggregation.  ODE will use the Provider Exchange Network (PEN), which I originally developed for MenuVantage.  They are still running the network in good earnest.  Route One is also a PEN user, so maybe there is room for “co-opetition” between the two aggregators.