The halcyon days of runaway auto sales growth are coming to an end. October 2016 marked the sixth straight month of auto sales declines, a trend we have not seen since before the Great Recession. On an annualized basis, total auto sales are projected to decline in 2016 for the first time since 2009.
Accordingly, both auto dealers and auto finance source are wrestling with a new world order, where success will be defined not by how fast they can close a deal, but by how well they can work together.
The prognosis is still far from dire. All told, approximately 17.4 million new vehicles were sold last year, down just 1.7% from 2015. While that isn’t enough of a decline to trigger the panic button, it is enough to tilt the value scale in the auto dealer/lender relationship away from quantity and toward quality.
Change Is Coming
For nearly a decade, the combination of an improving economy, strong dealer incentives, and historically low interest rates drove a tidal wave of new- and used-vehicle financing. While this was generally a positive for finance sources, the trend did have its drawbacks. For one, competition increased, driving down margins to razor thin levels. Through 2015, the average interest rate on a 60-month new-vehicle loan for a buyer with a credit score of 760 or higher was just 1.67%.
The runaway pace of growth also commoditized the dealer/lender relationship by placing the primary value on speed. When your goal is simply to keep a surfeit of transactions moving through the door, the relationship between the two business partners in the transaction takes a back seat to deal-closing efficiency.
As the market gets tougher, this dynamic begins to change. According to results from the J.D. Power 2016 U.S. Dealer Financing Satisfaction Study, overall dealer satisfaction and likelihood of increasing business with specific finance sources were highest when lenders established close, collaborative relationships with dealers.
What, exactly, does a collaborative relationship between a dealer and a lender look like? Based on the 20,000-plus finance provider evaluations we reviewed, the key differentiators that separate the best finance sources from the pack in the eyes of auto dealers are dedicated underwriter teams, constant availability, and the willingness to go the extra mile to help handle complications and unexpected challenges.
Among dealers who had a specific underwriter or team of underwriters assigned to their account, 47% indicated that they “definitely will” increase the amount of business sent to a specific lender. When a dedicated team is not assigned, that percentage falls to just 35%. The ability to reach those teams whenever needed is also a critical variable in the relationship. Overall satisfaction scores were a full 120 index points higher when dealers reported that they were “always able to reach credit staff when needed.”
Dealers, much like the customers they serve, are also impressed when their lender partners go the extra mile on their behalf. Often, this virtue manifests itself in the finance source working closely with the dealer to address any complications or unexpected challenges that come up during the transaction. When lenders were reported to go the extra mile, overall satisfaction scores increased 78 index points.
Speed is still a factor, too. Though the dealer/lender value proposition is starting to change, an expectation has been set over the past several years that error-free contracts will be funded on a same-day basis. Across the study sample, 58% of dealers indicated that they “definitely will” send more business to a lender when they are able to hit the same-day threshold.
Ultimately, what we’re seeing in the data is a gradual evolution toward a more traditional business partner relationship, one that’s rooted in strong communication, dedicated service, and the ability to step up to challenges.
Lenders who succeed in this increasingly challenging macroeconomic environment will be the ones that are best at tailoring their offerings to dealer needs and demonstrating repeatedly that they are as committed to closing a transaction as the dealer is. In some cases, that will mean developing specialized customer account teams to service dealers day and night. In others, it will mean a focus on quality control to ensure consistent, reliable results. In all cases, it will be critical to maintain this level of personalized service without compromising the level of efficiency that has been the hallmark of the last decade.
Jim Houston serves as senior director of automotive finance at J.D. Power. Email him at [email protected].