Watching the Economic Pendulum?

The retail automotive industry has been riding a five year high with average 8.30 percent year-over-year increase in unit sales from 2011 to 2015 according to data from Wards Auto. With the rapid pace of automotive industry growth lending requirements loosened, longer term loans became the norm and more customers who had been holding off on purchasing a vehicle returned to dealerships.

Just like within any economic cycle, after a period of expansion, the pendulum swings to a period of economic reduction. And, everyone is avidly watching the signs to see when that pendulum will start to swing.

Experian’s latest State of Automotive Finance Market Report listed  average new vehicle loan terms increased to 67 months in 2015, while used vehicle loan terms increased to 63 months. This has resulted in a significant growth of negative equity on car notes.

According to the NADA Used Car Guide (NADA UCG), the percent of originations, including trades that carried negative equity, increased year-over-year by 2 percent. In addition, NADA UCG also stated, based on data from J.D. Power’s PIN Network, of the cars that had an equity position in 2015 and 2016, the trade-in value decreased by 50 percent. In Q1 of 2015, the average trade-in value for a car was $1,000. By Q1 of 2016, the average trade-in value had decreased to $500.

While trade-in values are falling, so too are used car prices. In fact, NADA predicts used car prices to fall between five and six percent this year as more off-lease vehicles enter the market. Lastly, Q1 delinquency rates topped one percent this year, the highest Q1 rate since 2011 according to TransUnion, jumping 13 percent year-over-year.

All together, these market changes point to a possible nudge in the Pendulum. Smart dealers need to start evaluating how to keep their margins from shrinking as lenders consider when and by how much to tighten lending requirements.

The good news is dealers have a built-in opportunity to do just that with their F&I department. As a retail automotive professional, you know the benefits of selling a vehicle service contract (VSC). Put your lending hat on to determine how those benefits could affect your lender partners.

Consider, for example, the inevitable event of a consumer making their monthly car loan payment and suddenly experiences a vehicle breakdown. How likely do you think they will be able to pay for costly mechanical repairs and make their loan payment? And, if you were that consumer, which of those needs would you prioritize? You’d most likely prioritize fixing the car so you can continue commuting to work. Then what happens? The car becomes delinquent, right? Can’t you see how a VSC could help lenders reduce delinquency rates?

Remember, your team has to sell these products to lenders just as they have to for customers. By demonstrating the value of F&I products in terms of helping your lender partners increase their business and maintain a proactive risk strategy, you have the potential to maintain strong relationships with your lenders and you have their ear when it comes to negotiating loan terms on behalf of a customer.

This, of course, comes down to how you maintain your relationships with your lenders. If an F&I manager calls a lender to discuss the benefits of F&I products, but they don’t even know the lender’s current lending requirements, how likely do you think it will be for that lender to listen to the presentation?

Level set with your team and ask:

• Do you know all the lending requirements for all the lenders we work with?
• Do you work with lenders to send enough business their way to justify taking on subprime paper?
• Do you schedule regular meetings to discuss the amount of loans we are sending their way and what could be addressed to increase that amount?
• Do our lenders understand the benefits of F&I products to their loan portfolio?
• Are our practices in compliance with all lending requirements?

Provide ongoing training and follow-up to ensure your team is set up for success in essentially selling your dealership to lenders. Make it a point to discuss in your weekly team meetings the strides your team is making in cultivating lender relationships. With the anxiety in the air over when and how quickly the economic pendulum will shift, now is the time to ensure your lending relationships are set.

With almost 40 years of experience in retail automotive, EFG Companies knows how to help dealerships nurture their lending relationships with everything from strategic product development to training and compliance. Contact us today to find out how.