What is a buydown?
A buydown, in the context of floorplan financing, refers to a situation where the interest rate on the loan is reduced for a certain period. This can be achieved through an upfront payment that lowers the overall interest rate for the duration of the loan or for a set period.
This financial strategy may become necessary when the total amount associated with a floored vehicle, particularly one with an existing lien, exceeds the allowable value on the dealer’s floorplan.
In essence, a buydown involves reducing the outstanding principal amount on a vehicle to bring it within the acceptable value range as specified by the lender.
What do independent dealers need to know about buydowns?
The purpose of a buydown is to reduce the cost of borrowing, making the financing more affordable for the dealership. This can be particularly attractive in high-interest-rate environments or when a dealership is looking to increase its inventory levels without significantly increasing its financing costs.
Buydowns come into play when a dealer acquires a vehicle, and the total amount associated with it surpasses the allowable value on the dealer’s floorplan. This situation often arises when there is an existing lien on the vehicle, and the funds are being directed to the lienholder.
Floorplan financing is a common practice in the automotive industry, enabling dealers to finance their inventory. However, when the value of a specific vehicle exceeds the predefined limit on the floorplan, a buydown is necessary to bring the unit within the acceptable range. This practice applies to both non-auction purchases and auction acquisitions.
Whether a dealer acquires a vehicle through non-auction channels or participates in auctions, the need for a buydown arises when the purchase price surpasses the allowable value on the floorplan.
What are some dealer tips for buydowns in used auto sales?
- Accurate Valuation: Conduct a thorough assessment of the vehicle’s value before acquisition to anticipate potential buydown requirements. This proactive approach ensures that dealers make informed decisions regarding principal payments
- Communication with Lenders: Establish clear communication channels with lenders to understand floorplan guidelines and seek guidance on buydown procedures. Regular dialogue with lenders can facilitate smoother transactions and compliance with financing terms.
- Financial Planning: Incorporate buydowns into overall financial planning. Dealers should allocate resources strategically to address buydown requirements when acquiring vehicles that exceed floorplan limits.
- Documentation and Compliance: Ensure proper documentation of buydown transactions and adhere to all regulatory and contractual requirements. This includes accurate recording of principal payments and adherence to lender agreements.
AFC – your trusted source for floorplan financing
Ready to drive your dealership’s success? Unlock the power of industry knowledge with AFC, your trusted advisor for automotive finance. Learn more about floorplan financing solutions or take the next step and apply for floorplan financing today.
“AFC” refers to Automotive Finance Corporation, Automotive Finance Canada Inc., and AFC Cal, LLC in their respective jurisdictions. All California transactions are through AFC Cal, LLC. California loans will be made pursuant to Department of Business Oversight California Finance Lenders License. Canadian transactions are through
