Since 2011, the automotive industry has undergone rapid growth and rapid change, with an average 8.3 percent year-over-year increase in unit sales, the loosening of credit standards increasing the subprime market, and record-low interest rates, according to Wards Auto,.
Meanwhile, customers have been keeping their vehicles longer, forever changing the buying cycle of vehicles and affecting trade-in values. Longer term loans have become the norm, and customers are looking for more value from the dollar, meaning more value-added services and a higher level of customer service.
Now, with the Federal Reserve raising interest rates by 25 basis points this past December, and the expectation that rates will rise again later this year, it can be posited that lending restrictions will begin to tighten. With the upheaval of an election year, we can also expect customer buying patterns to be affected in the later part of 2016.
As with any economic cycle, after a period of expansion, the market turns to a period of economic reduction. The industry is avidly watching the signs to see when that turn will start to occur. Market flattening as a precursor of a potential downturn was a hot topic of discussion at the recent 2016 NADA Convention.
Signs of Market Adjustments
New vehicle unit sales are not the only indicator of market adjustment. Changes in loan originations also provide clues. At the first of the year, Experian’s State of Automotive Finance Market Report stated that 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. The NADA UCG also reflected that of cars that had an equity position in 2015 and 2016, the trade-in value decreased by 50 percent, based on data from J.D. Power’s PIN Network. 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 market turn on the horizon. Now is the time for dealers 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 are used to operating in a cyclical economic cycle. The smart dealers are already evaluating the lessons learned in 2008, and applying them to today’s stringent compliance and legislative environment. Those adjustments begin with the F&I department.
Fortifying F&I
Dealers that emerged as industry leaders after the Great Recession had a fortified F&I department and strategy. Improved practices ranged from creating a customer-centric product portfolio, establishing a cohesive team mentality between sales and F&I departments, enhancing customer service standards, and working with lender partners to create mutually beneficial loans for customers, dealers and lenders.
Typically a market turn in retail automotive corresponds with a larger economic market turn. Pull up your 2008 and 2009 reports and take a look at the products that sold the most, versus the ones that didn’t. Evaluate the reasons behind those sales and take a look at your current F&I menu to determine if any changes need to be made.
In addition, keep in mind that the CFPB is expected to look into F&I product sales in the future. So, when you are evaluating your menu, look at it with compliance in mind. Are your products cancellable? Are your marketing materials accurate against the contract? Do the products fill a real and calculable need?
Compliance inevitably leads to enhancing customer service standards. Sit through F&I presentations at your dealership. Audit your team with customer service in mind. Are they working to minimize downtime? Are they utilizing the interview on the sales floor? Are they spending time up front to listen to customers to tailor their presentations? Are they introducing customers to the service department? Are they making customers feel valued? While you might think that taking all these steps will increase transaction time, they actually do just the opposite.
Conducting the initial interview on the sales floor gives your F&I managers time to get paperwork prepared while the salesperson is still with the customer. If they need more time, the salesperson can give the customer a tour and introduce them to the service center, making them feel like their business matters while keeping them from watching the clock. By taking the time during the interview to understand their needs, your F&I managers have the ability to speed up the F&I presentation, and increase penetration rates and customer product knowledge by tailoring their presentation.
The Right Products Still Matter
Even though there is market volatility, having the right product mix is still important. As a retail automotive professional, you know the benefits of selling a vehicle service contract, but do your lenders?
Consider, for example, the inevitable event of a consumer making their monthly car loan payment and suddenly experiencing 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? When presented in this fashion, lenders can clearly see the value of a VSC in reducing 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?
Understanding Lending Requirements
Level-set with your team and ensure they understand all lending requirements for all the lenders you work with. Schedule regular meetings with lenders to discuss loan volume and what could be addressed to increase it. Take the time to educate lenders on the benefits of F&I products to their loan portfolios.
Lastly, for any change to produce positive results, it’s important that you provide ongoing training and follow-up to ensure your team is set up for success. Make it a point to discuss in your weekly team meetings the strides your team is making in compliance, customer services, and cultivating lender relationships. The dealers who take the time to prepare now will be that much better set for when the market turns.
As we move into the second half of 2016, market volatility may continue to be the norm. Dealers can’t change the broader economic climate – but they can change how they respond. Smooth out some of those fluctuations by relying on the tried and true principles – a customer-centric team – with strong lender relationships – that delivers a solid portfolio of F&I products.
