Educating Consumers on What Goes Into Auto Financing

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The scenario is a common one. A consumer strolls into a dealership with a lender pre-approval letter in hand. The consumer picks a car they believe to be within their budget, alerts the salesperson, and proceeds to finalize the deal. However, when they see the total amount to be financed, after title, taxes, fees, etc. are applied, they are shocked by how much more the vehicle costs than they expected.

This scenario happens all too often, especially with first-time buyers. For those lenders working directly with consumers, the last thing they want is for a consumer to look for a vehicle they actually can’t afford. The auto loan officers need to be prepared to walk consumers through the basics of budgeting for a vehicle, just like mortgage officers do with home loans.

Lenders can become a trusted consumer resource by highlighting some of the basic terms involved in setting the final amount financed. This starts by educating consumers on what goes into this calculation, beginning with the agreed-upon price of the vehicle and the trade-in value of their current vehicle.

The trade-in is what trips consumers up the most. Even if they haven’t finished paying off the vehicle, most consumers think they can apply the trade-in to their down payment. But this simply isn’t the case in most circumstances. Inform consumers that this is the scenario they want to see:

A consumer has a paid-off vehicle worth $10,000, and they are trading it in for a $30,000 vehicle, then the price of the vehicle before taxes and fees are applied is $20,000.

Taxes, title, license, and other dealership fees can add 10% or more to the vehicle price, taking the $20,000 vehicle to roughly $22,000.

At this point, the consumer can choose to apply a down payment. Most lenders would recommend a 20% down payment, which comes out to $4,400. This brings the price down to $17,600.

Now, let’s say the consumer wants to add production products, like a vehicle service contract, GAP, and a maintenance plan. This can increase the price by up to 10%, bringing the total amount financed to $19,360.

However, if a consumer is trading in a vehicle with negative equity, and they have little ability to apply a down payment, the situation can look very different. They can end up needing to finance more than the amount for which they qualify.

Showing consumers this breakdown helps explain the importance of trading in vehicles that are paid off and applying a down payment versus rolling negative equity into the amount financed with little to no down payment.

In the first scenario, if a consumer with a pre-approval letter for $30,000 goes shopping, they will end up using $10,000 less than the amount for which they were approved.

In the second scenario, a consumer might not be able to buy the vehicle they want if they shop for a vehicle that is priced at the maximum amount the lender is willing to fund. In this scenario, lenders need to be prepared to educate consumers on the fact that while they may be approved for a $30,000 loan, they need to shop for a vehicle in the $17,000 price range.

The fact of the matter is, very few consumers fall into the first scenario. That’s why this education is so important. With more than 40 years of experience helping clients achieve their profitability goals in retail automotive, EFG Companies knows how to train your team to be seen as relied-upon consultants in the auto lending process to differentiate your institution with consumers. Contact us today to find out how.

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