Will Interest Hikes Impact Dealerships?

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Earlier this month, the Federal Reserve increased its interest rate by a quarter of a point, and signaled they planned six more increases throughout the year. In response, banks with large auto loan portfolios raised their prime rates from 3.25 percent to 3.50 percent. The theory behind this is relatively straightforward. By raising the federal funds rate a domino effect takes place, slowing demand for goods and tapping the brakes on inflation. Whether directly or indirectly, a number of borrowing costs for consumers will also rise.

Prices for new and used vehicles have skyrocketed so much in the past year that an increase in interest rates may seem like small potatoes. The average interest rate on new car loans was 4.39 percent in February, relatively flat from a year ago, according to Dealertrack. The average for used vehicles was 7.83 percent in February, down from 8.25 percent. Car buyers taking out loans for a new vehicle borrowed an average of $39,721 in 2021, an increase of over $4,000 from a year earlier, according to Experian. As a result, monthly loan payments hit a record high of $644.

Car loans tend to track against the five-year Treasury, which is influenced by the federal fund rate. But the rate a consumer pays is based on credit history, the type of loan, down payment, type of vehicle and other factors. Those buyers with poor credit could pay more than 20 percent over the prime rate. For a consumer qualifying at the prime rate, a quarter point increase on a $40,000 loan is about $5 a month, or another $300 over the life of a five-year loan. For a buyer at subprime or worse, a quarter point increase could make a significant difference on the type of vehicle, the terms of the loan or even a “no-go” decision to purchase a vehicle.

Sell on Value, not Interest

How can a dealer make the most of these increases in interest rates? Selling on value is the key. Your dealership can be a source of information, providing expertise to buyers. But, your team must have the right training and your F&I office needs the right portfolio of products in order to be successful.

Emphasize value-driven selling

These days, consumers have many concerns – from finding a car, to affording that car. Make sure your dealer staff has the right training to answer every question clearly and transparently. Walk consumers through different scenarios involving their credit score, loan terms, down payments, etc. By serving as a trusted advisor, your dealer staff can secure the sale and have a customer for the long term.

Focus on valuable protection

With limited inventory and rising prices, buying a vehicle is expected to become a more challenging process in the months ahead. Make sure your team clearly explains the various ways to protect that investment. For example, purchasing a used vehicle with a CPO attached lessens the financial risk of a major repair down the road. Adding a VSC to a family car also guards against expensive unexpected repair costs. When your team can clearly demonstrate the value of protection products, both the dealer and consumer benefit.

After two years of “take it or leave it” tactics, now is a great time to refresh your team on the basics of quality customer service. Give your team a refresh on how to provide good guidance on different financing options and the value of vehicle protection with EFG Companies. As your strategic business partner, and F&I leader, we bring a wealth of industry expertise, business acumen, and tools to drive value for our dealer clients. Contact us today to learn more about our profitable solutions that can drive success for your business in 2022.