The State of Automotive Finance in 2020

by John Kehm

The state of the automotive finance market, like the rest of the automotive industry, is one of upheaval and complexity. The good news is the automotive industry is beginning to rebound, and car shoppers are returning to auto dealerships.

While a shifting marketplace adds complications for dealers who are trying to get their doors all the way open and their people back to work, it also creates opportunities to make up lost ground elsewhere by making gains in F&I in the new environment.

In this blog post, we’ll explore these opportunities and assess the state of the automotive finance market in 2020, including:

How consumers are re-entering the automotive finance market
What the shifting balance between new and pre-owned sales means for the automotive finance industry
What changing consumer shopping behavior means for online automotive financing

The Car Buyer Come Back

Predictions that consumers had largely only paused their car shopping, rather than cancelled their purchase plans, appear to be holding true as shoppers began returning to auto dealerships in May. According to Google, consumer search interest for “is it a good time to buy a car?” was nine times higher in March and April of 2020 than it had been in January and February.

Rising consumer interest appears to be driven by generous manufacturer incentives, including zero-percent financing. In fact, a recent study by AutoTrader found 9 out of 10 new vehicle shoppers believe right now is the best time to get a good deal on a new car.

However, many of the most generous OEM programs are expected to sunset soon, as the lack of new-vehicle inventory limits their usefulness. That will put the onus of delivering attractive automotive financing back on dealerships, highlighting the importance of having an F&I team connected directly to your new and used sales teams and making a firm financing offer part of the car sales process.

Before the pandemic, affordability was consumers’ greatest concern. Widespread layoffs, furloughs, salary cuts and other household economic shocks have made that an even more immediate issue for many shoppers. Prioritize proactive F&I involvement in the early stages of the car sales process, starting with your first marketing touchpoints.

Using Used Cars to Grow F&I Profits

The pre-owned market will increase in importance for the rest of 2020 thanks to a combination of OEM production disruptions, increased used-vehicle supply from massive rental car defleeting and consumers being more cautious with their spending. That means dealers must ensure they’re taking pre-owned automotive financing more seriously than ever before.

According to NADA’s annual surveys, dealers have been making steady progress at capturing pre-owned automotive finance business, growing their used F&I market penetration share from 54.5% in 2010 to 77.8% today. That’s approaching the 80-90% average figure for new vehicle F&I that has been the benchmark for the past decade and beyond, and it’s a reason why F&I gross as a percentage of all pre-owned sales is up industry-wide almost 25% from 2010.

To capitalize on current automotive finance trends, focus on marketing F&I products such as extended warranties and wrap coverage to offer price-conscious consumers longer term peace of mind.

Putting Automotive Financing Online

While three-quarters of pre-owned sales were financed through dealer F&I in 2019, that doesn’t mean 2020 will follow suit. That trend was already being challenged by the growth of online shopping. A 2019 FICO study found that 28% of consumers plan to apply for automotive financing online for their next car purchase, while 32% plan to visit a financial institution and 40% plan to use the dealership.

Since then, the COVID-19 pandemic has pushed many consumers into new comfort zones of handling more and larger transactions online, as well as limiting the appeal of physically going to a bank or credit union to take out an auto loan.

This highlights the importance of making sure your “digital dealership” prominently includes automotive financing options. Ensure your dealership’s BDC is prepared with the tools and information needed to seamlessly connect customers to your F&I team. Consider ways to simplify and improve the digital F&I experience, such as offering options like e-signing or video chats for customer interviews.

Getting your car dealership’s digital retailing process up-to-speed may require investing in new dealership solutions, but in today’s highly competitive market, the potential benefits can’t be ignored. A study by NADA found F&I profits rose 58% on new vehicles in April compared to February among respondents with a digital retailing process, versus 35% at dealerships that didn’t offer digital retailing.

Does your dealership have the tools in place to make F&I a key profit center in 2020’s complicated automotive finance market? Contact us to learn more about how Mastermind can help.

Explore additional resources related to auto sales in the post-pandemic market.

The State of Automotive Finance in 2020: What Dealers Need to Know