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Will There Be Financing?

June 2008, F&I and Showroom - Feature

by Marguerite Watanabe - Also by this author

It's difficult to ignore the challenges the industry faces this year with reports coming out daily about lowered forecasts for vehicle sales, used-vehicle prices dropping, suppliers struggling, and stock prices for major dealer groups weakening. What's unfortunate is the dim news includes the automotive financing side of the business, which was the saving grace for many dealerships last year.

Before the problems in the subprime mortgage industry were realized last year, the industry warned of shrinking margins, growing regulatory and legislative constraints, negative equity and longer average monthly terms. Today, the problem is much worse, with finance companies finding it difficult to securing funding for their financing activities.

The problem stems from what the subprime mortgage crises did to investor confidence, as many are pulling back from auto finance of their overall retrenchment from financial services. Losses are also mounting for several financing institutions, mainly because of rising delinquencies.

Auto Financing's Threatened Role

Automotive financing has played a major role in the automotive retail world, whether it's through special financing programs, dealer credit or nonprime financing. Now that role is being threatened, with a greater amount of scrutiny being placed on financing sources. For some in the industry, the scrutiny is coming from the investment community. For others, the scrutiny is coming from within, especially for those who operate as a division within a bigger organization. And while captives would seem to benefit from the retrenching, they are also under closer watch by their parent companies these days.

Technology is also playing a role, with the introduction of dealer financing platforms leading to the commoditization of auto financing. While the platforms have allowed for greater efficiencies, they have also put all financing sources on an even playing field. And in today’s tightened credit environment, being able to innovate and differentiate is definitely a difficult challenge.

The industry is already seeing the consequences, with massive layoffs for some, market curtailment for others, and tightening of credit for almost all.

The question now is, will a solid base of financing sources be available to offer an adequate set of products and pricing across the full spectrum of business? Will the rates be enticing enough to get the deals done? Will customers have to postpone their purchases until they can afford it? Or will financing be able to help lift up the dreary sales situation?

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