Affordability issues call for creativity in the F&I office

As customers return to the car-buying market with sticker shock or residual debt, F&I managers, especially those who haven't experienced a downturn, may have to step up their game.

Over the past few years, interest rates have been extremely low. The average monthly payment still increased, but so did loan terms. There seemed to be multiple levers to keep payments affordable. Now that interest rates are rising, average transaction prices continue to climb and many advise against extending the loan term too far. F&I managers will have to act as consultants to get customers into a vehicle they like at a payment they can afford with the products to protect it.

Wes Lutz, chairman of the National Automobile Dealers Association, said this month that affordability problems are prompting new-vehicle customers to switch to leases or late-model used vehicles.

"Sometimes you have to reset expectations. They're not going to get the vehicle they want," said Lutz, president of Extreme Chrysler-Dodge-Jeep-Ram in Jackson, Mich.

More flexibility will be required in the F&I office to accommodate customers disappointed with what has been quoted on the sales floor. Lutz suggested dealers play with the trim levels of a vehicle to better align with a customer's budget.

Customer expectations for a preferred monthly payment haven't changed; it's still around $450 for a new vehicle, an F&I trainer said. F&I managers may need to come up with more creative ways to keep payments within that range.

Lengthening the loan term is a sure way to lower the monthly payment, but loan terms sliding into the 72- to 84-month range are ultimately worse for the consumer, said Jonathan Banks, J.D. Power vice president of vehicle valuations and analytics. Paying the same interest on a vehicle that's increasingly losing value can turn customers upside down over time.

"You're playing with fire from a negative equity standpoint with the 84-month loan," Banks said.

Meanwhile, some experts say F&I managers may be able to sell more products in a rising interest rate environment. When buying their next vehicle is further from reach, customers are more inclined to see value in a protection product to maintain their current vehicle, preserving it over the course of an extended ownership period or maximizing its trade-in value.

For F&I managers who made it through the recession, some affordability bumps may seem familiar. But younger managers who have been working in auto retail in an age of extremely low interest rates and who haven't faced widespread affordability challenges should pay close attention to the market and adjust their conversations and selling style to better match their clients' needs.