Introducing BSE Insights: A monthly brief that addresses critical topics
facing our industry and guidance on how to navigate it.
Finance Contract Length:
A Dark Hole Production issues have created a shortage of inventory affecting all
manufacturers and setting off a cascade of market conditions never
previously seen. Most new vehicles are being sold for MSRP or more, and
pre-owned values have inflated as much as 40% year-over-year in some
market segments. While most dealerships have been enjoying record gross
profits per retail unit sold, very few have been adjusting for what will become
results in the future.
Negative equity is something new car buyers commonly deal with when they
come back to the market early. However, few will be able to offset the level of
negative equity they’ll face after paying between MSRP and $5,000 over for
today’s market adjustment. The future for many pre-owned customers will be
even bleaker. There are currently an ocean of customers who, over the past
year, have purchased pickup trucks 5-7 model years old with 90k-125k miles for
$28,000 to $32,000. Add into this equation that most of these transactions are
being financed between 72 and 84 months (70.6 being the overall average).
Three years from now, after adding 30K-40K miles to those odometers, many
will wish to upgrade. These customers will potentially face $15,000 to $20,000 in
negative equity, and many of these are prime customers.
Successful people and companies often make decisions in terms of
tomorrow’s money, not today’s money. They understand that today’s
money will always be there because the price has already been paid.
Auto dealers who understand this philosophy are making necessary
changes now to protect their future. Forward-thinking dealers are
being proactive to minimize this ripple effect by offering leasing as an
option to finance. Some markets even have local lenders and credit
unions that even offer a reasonable lease option for pre-owned units.
While leasing has always been on the table, Experian Q4 2020
market data shows that “the percentage of all new leased vehicles
dropped to 27%, down from 31% in 2019″.
In today’s market, even customers who have never leased before
could be intrigued by the comfort of handing back the keys in three
years unscathed. Now is the time to focus on the leasing business so you
can guarantee your customer can come back in three years
financially sound. To do so, you’ll have to:
- Educate your sales and management staff on the benefits
- Leasing 101: Mechanics of the process for a customer
- Explain and build value of a lease contract in the current market conditions
In short, your staff must know the what and the why of leasing so they
can comfortably discuss this option. The sooner you start, the
stronger you’ll finish.
If you need any assistance in educating your team and creating a process that includes
lease options for all customers, please contact us to design a seminar for your team.
Edmunds – How Long Should My Car Loan Be
Wall Street Journal – The Seven-Year Auto Loan
Experian – U.S. Auto Debt Grows to Record High Despite Pandemic
Manheim – Used Vehicle Value Index