In today's automotive market, consumers are facing a unique challenge: Many find themselves upside down on their vehicle loans, owing more than their cars are worth. This phenomenon, coupled with the trend of consumers keeping vehicles for longer periods, has created a pressing need for innovative solutions. Dealerships, in response, are reimagining their business models, focusing on customer loyalty and service-drive business to thrive in this new landscape.
The Upside-Down Dilemma
Recent studies reveal that a significant percentage of consumers is facing negative vehicle loan equity. According to Edmunds, in 2021, a record 33.8% of trade-ins were under water, highlighting the growing issue of negative equity in the market. This situation arises when the value of the car depreciates faster than the loan balance decreases. This trend is driven by several factors, including longer loan terms, aggressive depreciation of certain vehicle models, and consumers' desire for newer, more feature-rich vehicles.
Extended Ownership and Expired Warranties
Compounding this issue is the trend of consumers keeping their vehicles for longer periods. The average age of vehicles on the road has been steadily increasing, with many cars lasting well beyond the traditional warranty period. According to IHS Markit, the average age of vehicles on the road has increased to 12.1 years. This means that many consumers are driving vehicles without any warranty coverage, exposing them to potentially costly repairs.
The Rise of Vehicle-Protection Plans
In response to these challenges, dealerships are increasingly turning to vehicle-protection plans to provide customers with peace of mind and financial security. These plans, which cover a range of services, including extended service plans, maintenance plans, road hazard coverage, roadside assistance, and theft protection, offer consumers a way to protect their investments and avoid unexpected repair costs.
Benefits for Consumers
Vehicle-protection plans offer several benefits for consumers. According to AAA, the average annual cost of vehicle maintenance and repairs is $1,186. Vehicle-protection plans can help consumers avoid these costs by covering the cost of repairs for covered components. This can be especially valuable for consumers who are already upside down on their loans and cannot afford unexpected repairs. Additionally, these plans often include benefits such as roadside assistance, rental car reimbursement, and trip-interruption coverage, further enhancing their value proposition.
Dealership Strategies
For dealerships, vehicle-protection plans offer a way to differentiate themselves in a competitive market and drive customer loyalty. According to Cox Automotive, customers who purchase a vehicle service contract are more likely to return to the selling dealership for service, with 71% returning for service in the first year compared to 56% of customers without a vehicle service contract. Additionally, these plans can serve as a revenue stream for dealerships. The National Automobile Dealers Association reports that F&I products and services account for approximately 25% of a dealership's gross profit.
Financial Benefits for Dealerships
In addition to providing valuable benefits to consumers, vehicle-protection plans also offer significant financial advantages for dealerships. These plans can serve as a lucrative revenue stream, helping dealerships boost their bottom lines and increase profitability. One of the key financial benefits of vehicle-protection plans is the ability to earn commissions on each plan sold. Dealerships typically earn a commission for selling these plans, which can vary depending on the type of plan and the provider. This commission can add up quickly, especially for dealerships that sell a high volume of protection plans. Furthermore, vehicle-protection plans can help dealerships increase customer retention and loyalty. According to a Cox Automotive study, customers who purchase a vehicle service contract are more likely to return to the selling dealership for service. This can lead to increased service revenue for the dealership, as well as additional sales opportunities in the future.
Additionally, vehicle-protection plans can help dealerships attract new customers and differentiate themselves from the competition. By offering comprehensive protection plans, dealerships can appeal to consumers who are looking for added peace of mind and value in their vehicle purchases. This can help dealerships stand out in a crowded market and attract customers who are willing to pay more for the added protection.
Another financial benefit of vehicle-protection plans is the potential for upselling and cross-selling opportunities. Dealerships can use protection plans as a way to upsell customers on additional products and services, such as maintenance plans or roadside assistance. This can help them increase their average transaction size and maximize their revenue potential. Overall, vehicle-protection plans offer a wide range of financial benefits for dealerships. From earning commissions on plan sales to increasing customer retention and loyalty, these plans can help dealerships boost profitability and stay competitive in today's automotive market.
Industry Trends and Innovations
The automotive industry is constantly evolving, and payment plans for vehicle protection are no exception. Recent trends include the introduction of more flexible rates and terms, allowing dealerships to tailor plans to meet individual customer budgets. Additionally, advancements in digital technology have made it easier than ever for dealerships to sell and manage protection plans, streamlining the process for both customers and dealers.
As the sector continues to change, dealerships must adapt to meet the changing needs of consumers. Vehicle-protection plans offer a way for them to provide value to customers while increasing revenue and driving customer loyalty. By understanding the challenges facing consumers and leveraging innovative solutions, dealerships can thrive in this new era of automotive retail.
Payment plans for vehicle protection are becoming increasingly important in today's automotive market. By offering comprehensive protection plans, dealerships can not only protect their customers' investments but also drive revenue and customer loyalty. As the industry continues to evolve, dealerships that embrace these trends and offer innovative solutions will be well-positioned for success in the future.
Brenda Kereakes is chief operating officer at Line 5 LLC, overseeing operations and driving growth. With a background spanning financial services, real Estate, insurance, and service contracts, she is anindustry thought leader in the finance-and-insurance space.
EDITOR'S NOTE: This article was authored and edited according to F&I and Showroom editorial standards and style. Opinions expressed may not reflect that of the publication.
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