Dealer reserve is the portion of the interest rate markup on a vehicle loan that the dealer earns as compensation for arranging financing. When a dealer secures a loan at a rate above the lender's buy rate, the spread between the two is the dealer reserve.
When a customer finances a vehicle through the dealership, the lender provides what's called a "buy rate" — the lowest interest rate they're willing to accept for that particular borrower based on credit profile, loan term, and other underwriting factors. The dealer may then present a contract rate to the customer that is higher than the buy rate. The difference between the buy rate and the contract rate is dealer reserve.
For example, if the lender's buy rate is 8% and the dealer offers the customer a loan at 10%, the 2-percentage-point spread represents dealer reserve income. The lender typically shares this reserve with the dealer as compensation for originating and presenting the loan. This is a standard and legitimate part of dealer compensation for arranging financing, and it's regulated by both federal guidelines and state-specific rules that cap how much markup is permissible.
Dealer reserve is separate from F&I product income. While F&I products like GAP insurance, vehicle service contracts, and GPS tracking generate their own profit streams, dealer reserve specifically comes from the financing arrangement. Together, these components make up a dealership's total backend profit. For independent dealers, understanding the interplay between dealer reserve and F&I product penetration is essential to building a diversified and sustainable backend revenue model.
See how dealer reserve, F&I products, and backend profit work together to drive sustainable growth.