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Low payments can help you sell more cars, but are you presenting the right auto loan terms to your customers?
Whether you’re a buy here pay here dealership with dealer-arranged financing, or a traditional dealership with bank-financing, customers will appreciate your firm grasp of the auto loan terms available to them.
Longer auto loan terms are becoming increasingly popular, especially when the majority of customers tend to focus on an affordable monthly payment rather than the actual cost of the car they want to purchase. Extending the terms allows for smaller down payments and lower monthly installments, which is sometimes all it takes to close the deal.
While longer auto loan terms have their benefits, there are risks
High interest and negative equity
Interest rates can be a lot higher with long-term auto loans, and if the borrower isn’t careful, they could end up living with a negative equity nightmare. While this may not seem like an issue you need to worry about, it can become troublesome when you’re taking that vehicle in trade down the road. Trying to keep their payments affordable on a new car can be challenging if the trade-in has depreciated, and they owe more than what the car is worth. You can no longer offer a low payment as an incentive to purchase the vehicle.
Defaults and delinquencies
Defaulted loans and delinquencies can also be an issue depending on the customer. Delinquencies have become such an issue for financial institutions that they may require higher down payments, even on extended term loans. If you’re always giving out loans to customers that default, you will not only lose money, but you will also run the risk of tarnishing your reputation with your financial institution.
Maintenance plans and extended service contracts
Long auto loan terms can also affect the ability to sell a maintenance plan or extended service contract to your customer. Service plans are much more expensive for older vehicles. Even if the customer buys a maintenance plan at the time of purchase, the rates will still be a lot higher because of the risks involved to the warranty provider. Warranty companies know that older cars are more likely to need repairs, and higher costs help them manage those risks.
Auto loan terms over 60 months
Buyers with high credit scores may want to take advantage of a 0% interest rate stretched out as long as possible. 72 or 84-month terms will lower their payments, and the money they save can be used to help pay off other high-interest loans they may have. Customers with good credit scores are a lot less likely to default or miss payments which is not only beneficial to you but also to the lender.
Even after six or seven years of use, a properly maintained vehicle should have a decent resale value. Your customer may want to keep driving their car after it’s paid off, but they may decide to trade it in towards the purchase of their next vehicle. Instead of having to roll over the remaining loan balance, the customer would be able to lower their monthly payment but using that money towards a higher down payment.
Knowledge is key
It’s the responsibility of the business manager to find loans that are appropriate for each client that walks into their office. Most customers are looking for a low-interest rate, but aren’t precisely sure which auto loan terms are right for them. Staying up to date on current rates and terms can help you lead them in the right direction.
It’s important to save all the bank rate sheets that come your way. Some managers like to keep a binder handy, so they are accessible at all times, while some dealers keep up to date information in their DMS. Bank rates and terms can also be useful for the rest of the sales team, so you want to make sure they’re aware of any changes. By using the reporting function in their CRM tool, they can see who may be in need of a new vehicle and come up with custom promotions based on special rates or auto loan terms.
As long as you stay educated, organized and aware of your client’s needs you can be confident that you’re presenting auto loan terms that are right for them.
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