F&I and Showroom, May 2016

www fi magazine com 24 F I and Showroom May 2016 T FINANCE INSURANCE F I pro says dealers need to consider the repercussions of longer term loans before making them their new normal Theres a lot of talk these days about stretching terms Ford Motor Credit being the latest finance source to introduce 84 month terms Its one of the reasons monitoring and managing our databases and uncovering hidden opportunities for contract and trade cycle interruptions is such a hot topic these days And there is a myriad of data mining and equity tools available to help facilitate this process Whether you invest in one of these tools to complement your CRM is up to you However if you arent leveraging the data you already have access to via your DMS and manufacturer portal you are leaving money on the table As an F I manager and a big believer in aftermarket ancillary sales and contract interruption three very critical questions come to mind By handing out 84 month auto loans are we slitting our own throats How is the trend toward extended terms going to impact our retention efforts going forward Are we sacrificing repeat business for the satisfaction of a one time transaction Of course we are But if we dont sell the buyer to begin with we have nothing to retain right And if we dont do it someone else will TEMPORARY REWARDS As you may know 84 months is longer than the current average length of ownership which according to IHS Automotive is 778 months for a new vehicle Whats driving this trend toward longer loans are vehicle prices In fact the high price of todays vehicle is whats also driving up leasing which accounted for 336 of all new vehicle transactions in the fourth quarter of 2015 The most popular lease term is 36 months however 37 to 48 month leases are on the rise Th e problem with stretching terms is we further exasperate our shortage of used cars We also take ourselves out of our future market For todays paymentconscience customer however we have no choice According to Experian Automotive loans with terms between 73 and 84 months the longest terms tracked by Experian climbed 12 from a year earlier to account for 29 of all new vehicles financed in the fourth quarter 2015 Herein lies the challenge and forgive me for stating the obvious Clients payments are lower but they are paying more over the long term Depending upon the APR the customer could have 3000 or more in negative equity than if we had simply contracted the customer at 72 months Before 84 months becomes your new normal think about the repercussions Make sure you have exhausted all other options More importantly ask yourself whether the risk is worth the reward PROS AND CONS Lets start with used cars Theyre more expensive right And while demand for quality used vehicles is high there are fewer of them available The reason is longer trade cycles which is affecting quantity and how much we pay to stock our lots Leases are also maturing less frequently as a result of longer terms so opportunities to purchase off lease cars are less frequent There is also a greater risk of delinquencies and repossessions This affects the lender and your overall portfolio with that lender Finally there is a greater likelihood of mechanical breakdown which could positively impact your service contract penetration The condition of the vehicle and resale value is greatly reduced by the time it reaches the seven year mark By the time an 84 month loan is paid off the average driver will have 105000 miles on the odometer You know what those units typically look like and they certainly are not the type of trades we want to keep for retail So what can we do to offset the impact of 84 month terms The answer is pretty obvious Promote leasing Of course this is contingent upon creditworthiness and driving habits But when leasing works its a win win for ISTOCKPHOTO COM ERWO1 Terror at 84 Months BY DIANE UZELAC