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The Expert Podcast brings you firsthand narratives from experts across diverse industries, including private investigators, general contractors and builders, insurance agencies, vehicle specialists, lawyers, and many others.
So, you've heard us talk many times on this channel about doing a car short sale and how to get credits from the lender and the selling dealer to reduce your negative equity. So, where do these credits come from? How do you do this? Well, first, when you look at credits, you have to look at where profits are made on vehicle sales. And if you look at this chart, you'll see a very very insightful comparison of profit margins. First of all, the source is NADA, Center for Automotive Research. NADA stands for National Automotive Dealers Association. This is the industry trade group for car dealers. and they get all the records, all the data from automotive retailers about how they make profits, what their percentages are.
And what this chart tells you is the historical PVR trend. What is PVR? PVR stands for per vehicle retail. So it tells you how much profit is made on a car per car, right? So you have two charts, FNI and used vehicle. Well, used vehicle is pretty straightforward. That tells you how much profit is made per vehicle retail when they sell a car. How much do you make on a on a used car? So, it shows that the profit was declining. From 2000 to 2004, it was almost 2,000 bucks. And recently, up until last year, it was only $1,500. So, the amount they're make on a sale of the vehicle went down.
However, let's look at FNI. FNI stands for finance and insurance. That's when after you buy a car, you go into that office and you sign your loan documents, you sign your paperwork, they make money in that office as well. Well, 20 years ago, they were only making $500 per car. Now, they make $2,000 per car. In fact, more of the profits on a vehicle come from the FNI finance department than comes from selling the car.
Where do they get their money from? Well, there are three sources of profits in the FNI finance and insurance department. The first source is the financing itself. When a dealership arranges financing for a car loan, they get a percentage of the interest rate. It's like a margin. So, they have what's called a buy rate and a sell rate. So if the bank says the buy rate for this loan is 7.5% if they can sell the rate at 9.2% they get a percentage of the difference. So there's a rate participation. They get a participation in the profit that the bank makes on the interest rate. That's source number one.
And if you look down further, it tells you how much that is. reserve income made up less than 30% of the total FNI gross profit. See where I highlight here? 30% of the total FNI gross profit came from reserve income. That means that that interest rate participation was less than a third of the profit that they made. The other 70% came from sales of other items. Those other items are things like gap insurance, maintenance contracts, service agreements, protection plans, radar detectors, all kind of add-on products that get added on to your loan. Many times they're presented just as a dollars per month. Well, it's only $18 per month for this protection plan, right? Fully protected, $22 a month. That's great. But it's not just per month. It's actually a fee, a lump sum added to your loan. Could be $2,000. It could be $2,500.
Most of these add-ons, whether it's gap insurance, it's protection plan, service, contract, maintenance agreement, extended warranty, all these menu items, and they probably gave you a menu of things you can pick from. Most of them can be cancelled. And when you cancel them, you get actually a rebate of the amount that's unearned by the dealer, by the provider. And that unearned amount, cancelled amount gets knocked off your loan. It doesn't reduce your payments. But if you have a $30,000 loan and you have 3,000 of add-ons that could be deducted, now your loan is only 27,000. So if you're looking to do a car short sale, that's the first thing you do is you knock off those add-ons.
Now, what about the rate reserve? Can you get some of that back? Well, not directly, but many times if you do the right type of inquiry to the dealership and you ask them about their procedure of adding on items and adding on rate reserve and asking them to consider contributing to your loan difference because of the fact that maybe their procedure wasn't correct, many times they'll kick in a little bit, but the biggest biggest factor comes from these add-ons.
And so if you think about it, let's do the math very quickly. PVR FNI, $2,000, that means $2,000 of the profit, not just the the sale amount, of the profit came from FNI. Well, we already know that only 30% came from reserve income. That means that 70% of this 2,000, which is about $1,500, came from the profit on add-ons. Now, the profit isn't what you bought it for. That's just how much the dealer made. They might make 50% profit. So, if they sold something to you for $3,000, they made $1,500 profit. They kept half. Half goes to the company that provides your warranty or your service contract. could be more. Sometimes the profit margins are more than 50%. That means that if you cancel it, you don't just cancel their profit. You cancel the whole amount of $3,000 minus whatever has been used.
Now, keep in mind, if you cancel these, you no longer have those protections. You don't have gap insurance, service, contract, maintenance. So, you only want to do this if you know you're not going to need it or if you know you're getting rid of the vehicle, doing a short sale, trading it in, so you can credit back those items because once you cancel them, you won't be able to use the benefit. So, be aware that that's a trade-off you're making. However, it's important to know how much money we're talking about. We're talking thousands of dollars.
And this is an average from 2019 to 24. This is when car prices and loan amounts were less. Now, in 2024, 25 and forward, we're seeing loan values much higher. So, the average PVR profit is probably going to be higher once it gets reported. We've already seen some indications where PVR profits from some dealers are closer to $3,000 now, and we'll take a look at that in the next video.
So, when you're looking at reducing your loan amount and you're wondering where is this money going to come from, here's an example of where dealers have a profit margin. And again, we're not trying to take away the value of benefits of dealers making profit. They have to make money to run their business. That's how they do it. And when you think about it, look at this average amount for a vehicle. If you sell a $40,000 vehicle and you only make 2,000, that's only like 5% profit, not even. So, dealers are entitled to make a profit. They're entitled to make money to run their business and have their inventory and all their advertising.
But what you want to do is use this to your advantage. Don't necessarily criticize them for making a profit. But if you're trying to get out of your upside down vehicle, recognize what options and what opportunities you have to reduce your loan amount so you can eliminate that negative equity. Make that gap smaller so you can get out of that car, maybe get into something else or get rid of your payment.
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