Reduce Risk by Counseling Consumers
Everyone has been in the consumer’s shoes when shopping for a vehicle. And, Everyone has experienced the excitement and relief that comes with knowing that the first loan payment is often not due for 90 days. But, lenders probably make it a priority to begin paying down the auto loan as soon as possible, i.e., make the first payment within 30 days, and then make the 90-day payment as well. They also probably counsel their family and friends to do the same.
Why? Because that additional payment helps to further reduce the principal, which also lowers interest payments in the long run. It’s common in the auto finance space to use that 90-day “waiting period” before the first payment as a further incentive to buy a vehicle.
This type of “advisory” selling provides two opportunities. First, the customer locks in a loan that better fits their needs while minimizing risk. Secondly, the life-long financial advice cements the relationship between customer and lender, rendering dividends for years to come.
Role Play The Risk
Consider walking through a role-playing session when faced with a customer eager to bypass that first loan payment. Some options to recommend:
Open a savings account with the lender and save for the vehicle they want. Additionally, encourage the consumer to commit to saving the equivalent of the first 90-day payment plus the accrued interest rate. Then, when the first payment is due, the payment is easily in hand.
Recommend investing in consumer protection products to be prepared for life’s inevitable situations. Who knows what life might be like 90 days from now? Is employment stable? Could a significant illness derail payment plans? Consumer protection products, like vehicle return protection, reduce the risk of missing auto loan payments and defaulting on a loan.
Recent research from the Federal Reserve showed that the average American could not easily cover a $400 emergency payment. Having a vehicle protection package in place can guard against unforeseen emergencies. Worrying about having a ride to work on Monday is not a comfortable position for the consumer and increases the risk of default for the lender. However, with a vehicle service contract, consumers can repair their vehicles without straining their budgets, allowing them to continue making their monthly loan obligations.
Delay Now – Or Default
As a lender, it is critical to understand the customer’s reason for choosing to wait to make their first payment until 90 days have passed or extended the length of the loan.
Again, education is critical when discussing the 90-day window. What should the customer know about an auto loan with no payment for 90 days?
- The first payment is typically due 90 days after the sale is finalized.
- Interest will accrue on the loan during that time.
- Making their first payment on the 30-day mark, and again on the 90-day mark, reduces the principal and therefore long-term interest.
The value of the first dollar paid on a new car loan is less than the last dollar paid – thanks to accrued interest. Lenders need to do themselves and their customers a favor by explaining the real value of that first 90 days.
With more than 40 years of experience in innovating profitable solutions in the dealership space, EFG Companies knows how to differentiate your business and create sustained loan volume. Find out how, today!
