Pitfalls and benefits of indirect, direct and equity loans

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By Charles Campbell
U.S. Compliance Academy

As the unusually harsh winter storms have calmed down allowing consumers to once again flock to dealerships in search of an RV, most buyers still seek the assistance offered by dealerships to secure financing of their RV.

Several dealerships have inquired about the various financial options available for consumers to purchase their RV from the dealership, including using proceeds from home equity loans and lines of credit.

The dealers want to ensure their staff is informed on the finance options available for their consumers, as well as those available through the myriad of lenders the dealership has an established indirect relationships.

First off, let’s be clear about one area of concern whenever any dealership staff offers finance options to consumers. Ensure that the dealership staff is offering financing options and not financial advice.

Offering financial advice is best left to licensed professionals such as investment brokers, financial advisors, attorneys or accountants.

For example, offering a consumer the opportunity to secure a great interest rate through one of the established indirect lending sources utilized by the dealership is done daily by dealerships without any issues whatsoever.

However, attempting to convince a buyer to switch from an direct loan offered by an outside lending source by offering financial advice on how to strategically accept the indirect loan offered by the dealership, and then take the projected savings and investing it in some sort of financial setup is treading on shaky legal grounds.

It appears that several senior dealership staff involved in the arranging of indirect loans for consumers are not fully aware of the differences, and potential benefits and pitfalls of some of the most common financial resources available to consumers for the purchasing of their RV.

Therefore, here is a simple layman’s view of some of the most commonly used financial options, along with some observations of potential benefits and pitfalls with each.

Direct RV loans

A direct RV loan is one that a consumer would receive directly from a financial institution, such as the buyer going to go to a bank or a credit union and securing a “direct” RV loan without working with the dealership staff to secure the loan.

In this type of direct loan process, the lending institution simply provides the consumer with a cashier’s check to purchase the RV.

Generally, in this type of situation, the consumer receives a buyer’s order from the dealership armed with the exact figures to take to the direct lending source and bring back a check for the RV purchase.

The benefits of direct lending are:

  • Guaranteed funds to purchase the RV.
  • The elimination of possible CIT (contracts in transit) issues.
  • Minimal exposure to Federal Trade Commission financing violations.

The pitfalls include:

  • Loss of finance reserve.
  • Loss of control as the consumer may decide to take the “deal structure” information to a competitor to ask for a better deal.
  • The potential loss of profits from ancillary products as consumers are less likely to accept the ancillary products when they finance their RV through their own direct lender.
  • The certainty of the loss of profit from selling the consumer a GAP product they would most likely receive from their lender.

Indirect RV loan

An indirect RV loan is when the consumer secures the RV loan through the dealership with an established “indirect” lending institution.

The dealership staff, working with several indirect financial institutions, assists the consumer with securing a loan that will work for the buyer’s desired personal budget.

Benefits include:

  • Earned reserves.
  • Complete control of the deal from the beginning of the sale to the final paperwork and delivery.
  • The opportunity to offer the borrower GAP coverage as well as other ancillary products by including them along with the loan for the RV.
  • A satisfied consumer that appreciates the dealership making the entire RV purchase as convenient and easy as possible.

Home equity loan

A home equity loan is a lump sum loan that a consumer makes full payments on the entire loan amount for a fixed number of years.

Home equity line of credit, commonly referred to simply as a HELOC, is a line of credit that allows the buyer to utilize the equity in their home on an as-needed basis. The HELOC can generally be set up on a fixed rate or on an adjustable rate loan.

The benefits of this type of financing include:

  • As far as the dealership is concerned, either of these two types of loans operates in the same manner in that the buyer brings in a check from their financial institution that arranged either type of loan for the consumer.
  • These are guaranteed funds to purchase the RV.
  • The elimination of possible CIT issues and minimal exposure to FTC financing violations.

The pitfalls of using home equity are:

  • Just as in the case of the consumer utilizing a direct lending source, there is the loss of finance reserves.
  • Loss of control as the buyer may decide to take the “deal structure” information to a competitor to ask for a better deal.
  • The potential loss of profits from ancillary products as consumers are less likely to accept the ancillary products when they finance their RV through their own direct lender.
  • The loss of profit from selling the consumer a GAP product that they would most likely receive from their lender.

The once-desired tax benefit of writing off the interest of a home equity loan or HELOC has been eliminated under the The Tax Cuts and Jobs Act of 2017.

That law, enacted Dec. 22, suspends from 2018 until 2026, the deduction for interest paid on home equity loans and HELOC, unless the funds are used to buy, build or substantially improve the taxpayer’s home that secures the loan.

According to the IRS regulations (IR-2018-32, Feb. 21, 2018), under the new law, for example, interest on a home equity loan or HELOC, which is used to build an addition to an existing home is typically deductible. However interest on the same loan used to pay personal living expenses, such as credit card debts, or used to purchase an automobile or RV, is not deductible.

This can be the subject of a great conversation with the dealership’s legal counsel, dealer principal and senior management to incorporate a policy regarding the discussion of lending options the dealership provides for their consumers.

Charles Campbell

Charles Campbell

Charles Campbell, SPFS, is the executive partner of the US Compliance Academy at Trans World Industries, LLC. Along with his extensive experience, over 30 years in the industry, ranging from F & I to General Manager, Charles is a nationally recognized authority in areas of F&I education and Federal rules, laws and regulations that relate to everyday dealership operations. You may reach Charles at charlesc@uscomplianceacademy.com.

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