A simple fact: too many cash deals will hurt your F&I sales since it’s much easier to sell a customer a product for $30 a month than to have them purchase it outright for $1,800.
Today’s cash purchase is really the result of one of four different buyer types: mortgage refinance, personal line of credit, cashing investments and an influx of cash in the bank
Coupled with the buyer types, here are the facts we face in today’s market:
- Interest rates are at an all-time low
- Prime rate in Canada dropped to 2.25 per cent in May, 2009
- Current mortgage rates can be less than prime
- Home equity personal line of credit rates can be as low as prime, occasionally less.
- Secure investments are producing very low rates of return in accordance with the low prime interest rate, giving safe investors little incentive to keep their money invested.
Each of these facts makes it difficult to compete with and successfully convert cash customers into dealer finance prospects. Consumers are being enticed into buying interest rates when they need to look beyond rates if they are really concerned with saving money. As business manager/financial services manager, it’s our responsibility to educate them.
Use an online calculator (I like www.citizensbank.ca/personal/calculators), then select the calculator you need based on the calculation you are doing – loan, mortgage, mortgage prepayment, investment, etc.). As always, using third party tools adds credence to your presentation.
It's a 25- to 35-year plan. In five years, there will barely be a dent in the amount paid-off against the vehicle debt and total interest paid will be two to three times more than financing with a standard dealer finance loan.
Practice with some numbers yourself and compare: interest costs on a mortgage that includes the vehicle purchase to interest costs on a mortgage without the vehicle purchase.
The longer the mortgage is amortized, the more interest will be saved using a dealer finance loan and most mortgages today are financed over 35 years.
Over and above additional interest costs, consider the value of the vehicle after five or 10 years compared to the amount owing on it. It's a challenge to trade the vehicle in when the amount owing is far in excess of its value.
- To read the rest of Cathy's column, check out the next edition of Canadian AutoWorld -