Long loans can help make case for F&I products

One dealership perk to long-term car loans? There's more opportunity to convince customers that they need F&I products.

In general, the industry prefers shorter trade cycles because customers come back to buy more often. But one upside to long trade cycles is that customers see more value in some F&I products, industry insiders say.

Through March this year, the average length of a new-vehicle loan was 68 months, according to Experian, nearly 10 months shy of the average length of new-vehicle ownership. Consumers hang onto their new vehicles for 77.8 months, or about six-and-a-half years, on average, according to a 2015 IHS analysis.

Dealerships can create more customer awareness around the value of F&I products because of the long-term loan and ownership trend, Scott Karchunas, president of Protective Asset Protection, and other F&I vendors say. "It provides F&I professionals with more tools in the toolkit" with which to build a value proposition for F&I products, Karchunas said.

As long as lenders are willing to finance F&I products, sales of those products are "probably one of the strongest factors we have in terms of [dealership] F&I growth," said Larry Pomarico, senior vice president of sales for SouthWest Dealer Services.

One product that dealerships may be able to sell more of as a result of longer-term loans is guaranteed asset protection, or GAP. A GAP contract pays the shortfall when a policyholder's insurance payout on a stolen or totaled vehicle isn't enough to cover his or her loan or lease balance.

The size of the shortfall, or gap, could grow if consumers have a longer term loan, Karchunas said. For example, he said, if a consumer suffers a total vehicle loss 12 months into an 84-month loan, he could owe considerably more than he would if he had, say, a 48-month loan. That's because the portion paid on the balance of the seven-year loan likely would be smaller than the portion paid on the four-year loan.

"As loan terms continue to lengthen, many consumers will be paying down their principal more slowly," Karchunas said. "When they have a total loss, they may be in a position where they have a larger gap.

"The average amount of GAP claims are moving directionally higher," he added. "The size of the average gap is growing. We're seeing that firsthand" at Protective.

Customers with longer loans also may see a greater need for a service contract because they're exposed to car payments and the potential for mechanical failures for a longer period, Karchunas said.

SouthWest's Pomarico said that as loan terms lengthen, F&I product offerings may evolve. "I think we're getting into a more bundled approach to present to the customer," he said. "We can sell three to four products that have some synergy to them."

The products themselves are unlikely to change, but the coverage will be more customer-friendly, Pomarico said. Many F&I products exclude curb or cosmetic damage, which customers with average loan terms may not see the value in having. Customers with longer loans, though, see benefit in having protection against burns and rips and other wear and tear, Pomarico said. Dealers can "increase the premium and price of the product to cover those things," he said.

Bundling and "hassle-free" coverage, Pomarico said, will be the key to selling products to customers with long-term financing. Many of his F&I manager clients give customers a visual presentation of their ownership cycle over five to seven years. They show customers what potential expenses they would be responsible for and how long.

Other dealerships likely are doing similar presentations. Rick Kurtz, senior vice president for distribution at Protective, believes most F&I staffers are clued into the potential for F&I sales that come with the trend toward longer loans and ownership. There is always room for more education, he said, but many F&I managers "likely have identified these changes as an opportunity to reinforce the long-term value of the various products."