Customer financing is a way to let customers pay for goods or services in installments instead of up front. When you offer financing to your customers, you make your vehicles more affordable and put their dream car within reach.

Consider that 2 out of 3 customers are probably borrowing some portion of their purchase. Asking the right question from the start of the process will lead to more sales, and at a higher profit per sale.

Many customers do not actually realize which cars they can afford. They may say that their budget is $10,000.00, but they are doing a payment calculation in their head.

To give you an example, a 2013 model can be finance for 3 years. If the car sold for $10,000.00, the payment would be $190.00 bi-weekly with $0 down. A 2016 model can be financed for 5 years. If the car sold for $15,000.00 the payment would be $180 bi-weekly with $0. The client would be paying less for the newer and more expensive vehicle. Unless you know how your customers are calculating their budget, you might miss the sale.

Salespeople should be trying to move the conversation from a round number to payments from the start. It is much more difficult to move to payments after talking solely about the cash price first. Starting the conversation with a smaller amount will open your customer’s mind to other possibilities.   

Financing also offers a better opportunity for profit. You can ask the customer to pay $1,000.00 plus tax for a warranty right away or ask $13 per payment over a 3 year term. Which scenario is more likely to lead to a sale? This also applies to after-market products like winter tires, rust proofing, rims, and all kind of products.

Sit down with your customer and begin your conversation with a simple question, “What is your monthly budget?” You can better asses what the expectations your customer has in regard to what they can afford.

Auto financing is the easiest way to increase sales and profits. There is a direct relationship. A higher ratio of finance contracts per total sales will lead to more cars sold, and higher average profit.

Risman, M (2023, November 24). Why to finance vehicles instead of selling for cash? Part 3. Ontario Underwriters Newsletters. https://on-u.org/newsletters/

Part 2: Benefits for customers

There are two main ways of buying a new car: in cash (paying the total cost in full), or with car financing. Although it might seem like common sense to just pay upfront with cash than taking out a loan, it’s not always the case. Even if you have some cash in reserve, taking out a competitive auto loan can have a lot of advantages which include:

• Most of the time your customer will say that they are paying from their cash savings, they are using another method of borrowing to pay you for the car (usually from a line of credit).
• Not taking funds from a line of credit or savings account gives a little liquid flexibility and leaves room for an emergency fund to draw on.
• Taking out a car loan spreads the payments over a longer term, increasing the chances to buy a newer/better car instead of being restricted to the cash available.
• May improve credit score. Signing off on a loan that can be paid off is a great way to watch your customers credit score grow. Adding an auto loan can diversify the credit mix and slightly boost the credit score.
• With financing, your customers will own 100% of the vehicle at the end of the repayment term, yet they will still have the cash sitting unspent in their account or leave a credit line untouched, just waiting for a rainy day.
• The majority of auto-loans in Canada are open with a fixed rate while credit lines have variable rates. Cars are a depreciating asset, and most people pay only the minimum payments, which leaves the customer in a negative balance.

In summary, the auto dealer ALWAYS benefits from a client who finances their auto purchase. Dealers who also know how to explain the benefits of financing for that customer, will make move sales, and have a higher profit per sale.

In the last part of this series we will explain how to sale financing to customers.

Gonzalez, N. & Risman, M (2023, November 17). Why to finance vehicles instead of selling for cash? Part 2. Ontario Underwriters Newsletters. https://on-u.org/newsletters/

Given the announcements last week by the Federal Government regarding Canada’s immigration targets, we at DAC thought it would be timely to look at the Canadian new light vehicle sales market from a population perspective. Due to the pandemic and semiconductor shortages, sales decreased dramatically in 2020 and remained down as vehicle shortages held back the market in 2021 and 2022. However, amidst this environment, one factor that does not receive enough consideration is the rapidly increasing Canadian population.

Between 2017 and 2022 the number of Canadians of driving age (defined broadly as 15+ years) increased by a stunning 2.2 million people. Putting this into a sales perspective, sales of new light vehicles among reporting manufacturers reached 67 units per 1000 people (aged 15+ years) in the peak sales year of 2017. With declining sales and an exploding population this number decreased by a remarkable 32% by 2022, to only 45 vehicles per 1000 driving aged population. “When population growth is taken into account, the ground that the Canadian new light vehicle sales market needs to re-capture widens” commented Andrew King, Managing Partner at DAC. “However, 2023 has seen a pattern of sustained sales increases thus far and rising population should support additional market demand in the medium and long terms.”

Azarov, D. (2023, November 8). The Impact of Canada’s Exploding Population on Vehicle Sales. DesRosiers automotive reports.

Benefits for Used Car Dealerships

The advantages for a used car dealers to offer financing are clear and well know since almost 50% of all car sales are financed. To name a few of the reasons why offering financing to your customers is a good idea, please continue to read the following points:

• By offering financing to customers, businesses can boost their sales, and increase their average sales transaction size. Financing allows customers to make regular, affordable payments toward the cost of a big-ticket item, instead of paying the full price up front. Taken in consideration that according to the AutoTrader Price Index Report, the average new vehicle price in June 2023 was $66,288, 21.3% above the price in June 2022. As for used cars, the national average is currently $39,645, 4.1% higher than it was the prior year. Flexibility in customer payments will make a big difference. Cost is often the first consideration for customers shopping for a big purchase: they want to know if vehicle they want will fit within their budget.

• By leveraging auto finance, you can eliminate the sting of sticker shock for your customers and shift the conversation away from total costs. Instead, you can show customers how low monthly payments can allow them to buy exactly what they want. Financing allows you to re-frame the sales conversation, shifting the focus away from budget constraints to the value the purchase will bring.

• Financing increases a customer’s purchasing power. Not only does financing make it easier to close a potential sale, but it’s also a powerful tool for upselling. You can demonstrate to customers how a small increase in their monthly loan payments can allow them to afford upgrades or additional products. The option to add after market products, like warranties, winter tires, rust protection packages, etc. will increase the profitability of the transactions.

• Offering consumer financing can give you a competitive advantage, allowing smaller dealerships to compete with franchises and Automotive Groups. Your business can attract new customers by offering financing plans. If a prospective customer is shopping around for a big purchase, they may be more likely to choose your company over a competitor that doesn’t provide financing options. It can also help you earn repeat business, as customer credit programs often motivate customers to return for future purchases. A study shows that 93% of buyers that use consumer financing for the first time would use it again.

• Allowing finance as an option to manage better your customer budget, they can take advantage of a sale that can be perceived as a “Good Offer” without worrying about affordability in that regards. Fortunately, some new and used cars have dropped in price, and car buyers looking to save money can still find deals. It is expected that average car prices will reduce gradually, but inventory has remained an issue due to ongoing supply chain disruptions and inflation.

For a used car dealer, finance could make the difference between and a day cleaning cars or a day with a successful sale.

In our next part of this 3 part article, we will be reviewing the benefits of financing for customers.

Gonzalez, N. review by Risman, M (2023, November 3). Why to finance vehicles instead of selling for cash?. Ontario Underwriters Newsletters. https://on-u.org/newsletters/