Will direct-to-the-consumer, Web-based loan application models eat into dealer finance business?
Today, there is almost nothing connected with the auto industry that isn't migrating on to the Internet. Dealers can obtain and track Internet-generated leads, show cars, get training, manage inventory and even process loan applications. Many dealers have real concerns about how the Internet will affect who they are, what they do and how they will make money.
Will web-based loan applications, offered directly to the consumer, for example, eat into the dealer finance business? There are dozens of e-commerce initiatives designed for financial institutions that are based on the premise that consumers prefer direct lending opportunities when they are linked to auto research sites on the Web. These direct lenders may get the earlier shot at financing the customer.
What does that mean for the dealership of the future, one in which F&I profits will most certainly continue to play a critical role? First, let's look at the facts as they exist today. One, dealer financing accounts for about 70% of auto financing. Two, dealer financing has always been a better deal for the consumer than direct financing. This is due as much to the intense competition in the indirect lending field as to the motivation of dealers to find the best rate for their customers. And three, vehicle purchase and the final decision about financing will continue to occur most often at the dealership.
These three facts, if leveraged correctly, can form the basis for a dealer strategy which takes advantage of the new electronic forum for auto financing, not one in which F&I profits are slowly eaten away. The key is to increase the pool of indirect finance resources from which to draw. If your F&I manager has more quality financing alternatives, prime to sub-prime, than the customer could possibly walk in with of their own, the dealership will win every time. And there are other benefits to electronically processing credit applications. A system by which customers electronically enter in their own credit information at the dealership eliminates the commonplace errors of keying in incorrect information. The F&I manager also has the luxury of submitting this application to lending sources around the block or around the country. He or she is no longer limited by geography.
Of course, the ability to use the Internet to obtain a loan, just as any other type of comparison shopping, has made the process much easier for the Internet literate consumer. But it still requires determination, along with the time and inclination to work through the appropriate pre-purchasing homework. A dealer, on the other hand, can take a consumer credit application and within a few minutes or hours, distribute it to several banks or finance companies they think will have interest in the application to see what their various products look like. This is the promise of a profitable future for the dealership that chooses to ride the new "superhighway" rather than allow consumers to use it to bypass your F&I department.