Beware: Those Free Loaners Can Drain Profits
By Mac Gordon Ward's Dealer Business, Aug 1, 2004 12:00 PM

Free loaner vehicles can be customer pleasers, but also profit eroders, veteran dealer accountant Carl Woodward warns.

Dealers should set a reasonable limit on the number of free loaners available to service customers “and stick to that number,” the Bloomington, IL-based CPA advises, also counseling clients against using 3rd-party rental companies for free loaners.

“The daily cost for 3rd-party-sourced vehicles is much more than the cost of loaning out the dealership's own one to two-year-old program vehicles,” he says.

To decide how many free loaners are reasonable, Woodward recommends the following formula:

• For a median dealership selling 80 new vehicles a month, 8% of retail or six loaners
• For an average dealer selling 100 new vehicles a month, 9% of retail or nine loaners

His survey of more than 100 dealers indicates that the average cost of a free loaner was about $400 in either category.

“Dealers who loan a higher percentage of free loaners compared with their retail sales do not show measurable positive results from doing so,” he says.

He also advises dealers to keep track of which customers are driving free loaners on a daily basis.

More freebies get loaned out than necessary when there are no limits set, he says. “Those loaner costs will consume too much profit.”