EFG: Car dealers should thrive in remainder of 2022

Dealerships are poised to have a strong second half of 2022, EFG Cos. predicted in a midyear analysis.

"Post-COVID strong consumer financial positions, favorable credit terms and pent-up demand all spell revenue opportunities for dealer principals in the second half of 2022," the finance-and-insurance product company wrote in a July 14 news release. "Dealers who embrace new selling models, train and support their sales teams and are mindful of regulatory scrutiny will capture the sale versus others who pine for the return of the old days."

EFG made its predictions two weeks before the Federal Open Market Committee increased the federal funds target rate as expected on July 27. The Federal Reserve rate, which rose by 0.75 points to 2.25-2.5 percent, has a ripple effect on consumer interest rates such as auto loan APRs.

But Scott Kaskocsak, EFG dealer services executive vice president, told Automotive News on July 12 a "longer runway" would be needed to predict when such increases would begin to affect auto demand. He noted that interest rates remained low compared with the Great Recession.

"For dealers, favorable credit terms spell revenue opportunities for those who strategically manage their inventory purchasing and pipeline sales," EFG wrote. "Savvy dealers who embrace new selling models and offer pre-order purchasing with flexible financing are positioned to secure more than their share of sales."

Kaskocsak said he didn't think the Fed's 0.75-point increase in June to a 1.5-1.75 percent target had affected vehicle interest given the strength of consumer demand.

Analyzing future vehicle demand required consideration not just of interest rates but also inflation and gasoline prices, Kaskocsak said.

Typically, interest rate increases prompt customers with poorer credit to buy used vehicles rather than new ones, according to EFG spokesperson Ellen McGee. But they're still buying vehicles, she said. That's what EFG is seeing right now.

"However, we are in a very odd situation," McGee said regarding the current market.

EFGs' second-half analysis also encouraged dealerships to bundle third-party "certified pre-owned" F&I programs with high-mileage used models and promote F&I products at the point customers pre-order new models. Kaskocsak said EFG also was focused on ensuring its customers are prepared for electric vehicles and digital retail.

EFG also offered advice for credit union auto lenders and F&I agents in its midyear report.

Credit unions typically sell F&I products when offering direct loans to members, McGee said. But she said the lenders should also finance a greater number of products on indirect loans arranged by dealerships.

"They get greater protection for their risk on their loan," McGee said. A customer who can't afford an unexpected repair bill — the kind of costs F&I products cover — is likely to skip a loan payment to fix the vehicle, she said.

"They're not going to pay the auto loan and not have their vehicle running," McGee said of consumers. "Their vehicle running is their most important thing."

McGee said products also provide a way for lenders to differentiate themselves from rivals amid auto finance industry competition on interest rates.

"Credit unions should rethink their product criteria for members and provide loan products that are accessible to all people, regardless of credit profile," EFG wrote. "With low delinquency and charge-off rates, auto loans with value-driven protection products can drive revenue for credit unions."

Agents should assist dealerships with marketing F&I, inventory and service, EFG said.

"While merger and acquisition activities continue, those agents who help their dealer clients make their inventory more marketable will generate more revenue across the board," EFG wrote. "As dealers increase their focus on service retention, agents who offer tools to increase maintenance marketing will prove more valuable. In addition, agents who position themselves as trusted, expert advisors can help guide clients through digital-first hybrid sales models, marketing F&I and maintenance products at the beginning of the sales process, and effectively capturing trade-in vehicles."