Selling fixed versus variable rate

By Daniel Moher

Given today’s economic climate, selling a fixed rate over variable may make your next deal more appealing to the consumer.

In the last 30 years, variable rate has proven to be the better choice for consumers with prime interest rates decreasing steadily for more than 20 years. Since then, generally speaking, those who took a variable rate have seen interest payments decrease along with the prime interest rate. Needless to say, a lot has changed since the 1980s.

In the last two years, prime rate has increased marginally making variable interest rates increase slightly (three per cent prime, 4.99 per cent variable loan, in general).     Prime interest rates are now expected to rise gradually in 2013. What does this mean for the auto industry, and more specifically, F&I business managers?

It means using low prime rates as a way to sell your next unit more effectively. As short-term interest rates are as low as ever, F&I managers can make their next deal more appealing by selling a low fixed finance rate to the consumer that is very likely to stay equal to, or below prime if it rises long-term.

Go Fixed and Keep it Lower Than Variable
Consumers who took a variable rate before 2008 made a good decision as they saw the prime rate dip to an all-time low of 2.25 per cent in April 2009.

The consumer interest rate would coincide with it. Now, the reverse is occurring and prime is expected to increase making a low fixed rate the better option of the two.

The prime interest rate is as low as ever and it is not likely to dip any more than it already has.

“Short term interest rates in Canada have been left unchanged since fall 2010,” says Douglas Porter, deputy chief economist at BMO Capital Markets. “Our view is that they will remain unchanged for the rest of 2012, and will begin to gradually increase in 2013, by about one percentage point.”

Therefore, the best possible option for your next client is to take a fixed rate that is as low as possible, ideally, one that matched the initial variable rate loan. That way, the consumer can lock in an interest rate that will stay equal to or even below prime as it begins to rise again in 2013.

Consumers know that a car is a depreciating investment. If prime is so low it can’t go anywhere but up, why offer your client an interest rate that can only increase on an investment whose value is likely to decrease over time?

You might as well get a fixed rate that’s as low as possible now so your customer can feel good they have locked in when prime (variable) rates begin to rise again.

When asked to take a car buyer’s perspective, Raymond O’Kane, national director of BMO Retail Dealer Finance said this is one of the few times he would take a fixed finance rate on a car or home purchase.

“Fixed rates are relatively low, and there is a good chance that these rates will increase long-term, while there are no indications of them dipping any lower than they already have.”

There have been indications that rates may rise slightly earlier than this, but analysts are predicting 2013 is when rates will begin to gradually rise.

So why offer your client a variable rate that is expected to increase long term, when you can offer them a low fixed rate that is very likely to stay lower than variable over time? It’s a way the F&I managers can add satisfaction and value to the customer’s auto purchase in the business office.