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Changes in the Used Car Market to Benefit Auto Dealers

Posted by Brandes Elitch | Fri, Dec 20, 2019 @ 11:45 AM

used cars sign oldRecently, Experian released their Q3 2019 “State of the Automotive Finance Market” report. The authors made a couple of important points — mostly about changes in the used car market — that automotive retailers should take note of.

The good news is that used vehicles are generating a larger share of the U.S. automotive finance market. Used car financing increased 2.4% in 2019. It reached 55.15% of total financing. Why did this happen, and why is it good news for a dealer?

Why are used vehicles generating a larger share of the U.S. auto finance market?

One explanation is that there is an increased availability of late model cars and light trucks available for the dealer to sell.

Another factor is that today, about a third of buyers are choosing to lease a vehicle rather than buy it outright. The average lease term is two to three years. People who lease cars typically take very good care of them because they know they will be charged for any damage when they return the car at the end of the lease.

Rather than take them to auction, the dealer can recondition the vehicle and sell it as a “Certified Pre-Owned” vehicle, aka “CPO.” The manufacturer will have a CPO program that the dealer must follow to qualify for the CPO certified pre owned autodesignation.

For many consumers, this is the best of both worlds. Most of the depreciation on a new car happens during the time of the lease, the first two years. And the manufacturer will provide some important goodies, so it is almost like buying a new car, but at a lower price, and a much less steep depreciation curve.

For instance, you would typically get the manufacturer’s extended warranty, free maintenance, roadside assistance, and sometimes even a loaner car. The dealer will follow the manufacturer’s multipoint, detailed inspection and reconditioning process. Yes, two identical cars — one with the CPO designation and one without — will be priced differently. The CPO car will be more expensive, but it gives the buyer something very important: peace of mind. Many times, this is the single most important goal for the buyer.

More details from the Q3 2019 “State of the Automotive Finance Market” report

Experian reports that within the used vehicle market, the news was a shift in the “superprime” segment, which increased 3.3% to reach 13.42% during Q3. Now, prime and superprime buyers constitute 51.24% of used car buyers with financing.

Since the average new car costs about $38k and the average used car around $20k, it is not surprising that consumers are willing to agree to longer term loans to keep their monthly payment within their budget. Experian reports that the average new vehicle loan term is 69.28 months. Used vehicle terms average 64.89 months.

Similarly, Experian reports that the average vehicle loan amount has increased too. The average loan for a new vehicle is $32,480, and the average loan for a used vehicle is $20,466.

As a result, the average monthly payment increased too. For a new vehicle, it is $550, and for a used vehicle it is $393 (not that big of a difference, really).

Why is this good news for the dealer?

car with price signA dealer will typically make a higher net margin selling a used car than a new car.

Selling a new car will generate a gross margin of around 8-10% and a net margin of only 1-2%.

Typically, the dealer can make a higher margin selling a used car because the total dollars in profit will be the same or higher, but the expense of the sale will be less. This is because the dealer is paying less for the used car than for a new car from the manufacturer. The dealer can spend $700-1,000 on reconditioning, and make a profit of anywhere from $2,000 to $4,000, much higher than the profit on a new car.

Why is this important to a dealer?

Obviously, when a consumer walks onto your lot, you want to be sure that you are offering the right options to eliminate the perceived hassle of buying a car. You want to create a good customer experience (CX) for the consumer. You want them to tell their friends that buying at your store was a good experience, and that they would recommend you. You want them to come back and buy their next car from you, and you want them to bring the car back for servicing, too.

When a customer steps on the lot, the dealer has only one opportunity to make the sale. If the buyer does not have a good experience, they may leave halfway through the sales process. Typically, this happens during the F&I conversation when the consumer is applying for financing.

The dealer will have multiple sources of financing to meet the credit qualifications of the buyer. Buyers with lower credit scores will have to make a down payment in conjunction with the bank loan. As you probably know, many consumers, probably half of the population, live paycheck to paycheck and would not have a few extra thousand dollars for a down payment. CrossCheck has a solution.

How CrossCheck Can Help

Black Person Handing Check Across DeskJust ask the buyer if they could come up with the down payment if they were given an extra 30 days. Most of the time, they will say yes. Enter CrossCheck’s Multiple Check service, a future deposit function.

Then ask them to choose the dates and amounts of the first check payment (to be deposited within three business days) and three other check payments (to be deposited within 30 days).

Next, the F&I manager runs the checks (all bearing the same transaction date) through a CrossCheck imager to get an authorization. When that happens, we have effectively guaranteed those checks, so the dealer knows they will get paid and will not have to unwind the sale. We do the banking for the dealer and they never see a return item.

The consumer does not pay interest for this service; it is free to them. This creates a sale, and also important, it creates a good CX for the consumer!

Download our free guide to learn how Multiple Check can help your dealership close more deals.

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Topics: Auto Dealerships, Multiple Check

Written by Brandes Elitch

Brandes Elitch is Director of Partner Acquisition for CrossCheck Inc. A certified cash manager and accredited ACH professional, he garnered a Master of Business Administration from New York University and a Juris Doctor from Santa Clara University.