Seizing the Opportunity of Pre-Owned Vehicle Sales

© Can Stock Photo / GunterNezhoda

The used car market is feeling the squeeze. Last year’s significant hurricanes, coupled with two years of wildfires, have put a severe crimp on the used car inventory across the United States. Used vehicle sales volume increased by 3% year-over-year in July, according to Cox Automotive. The annualized pace of used vehicle sales was up 1% over last year led by franchised used vehicle sales (up 2% in July on an annualized basis) and private party used vehicle sales (up 4% in July on an annualized basis). The estimated July used SAAR should be 39.2 million, the strongest July reading in six years.

Even the often-ignored used compact and subcompact vehicles have seen a surge in demand. Early this year, dealers and industry analysts started to see a change, with sales and prices for used compact and subcompact cars increasing after declining every year since 2013. The automotive analytics company Black Book reported that sales of used compact and subcompact cars each are up 5% in the first quarter, averaging $13,464.

Traditionally popular trucks and SUVs are still in demand. Cox Automotive predicts that approximately 300,000 more off-lease SUVs and trucks will enter the market in 2018, bringing the total inventory to 3.9 million. Even with this influx of inventory, pricing for these vehicles is expected to remain strong. Edmunds analysts believe that gas prices in the second half of 2018 have the potential to sway market demand. By the end of March, the national average price per gallon of regular rose to $2.61, 33 cents higher than the same time the year prior. It continued to jump during the second half of the year, with prices now hovering around $2.85, 58 cents more than a year ago, according to AAA. As gas prices climb, consumers shift towards buying more economical compact and subcompact models.

Constricting the Flow

On-lot pricing is only part of the equation for the used car market. Dealers purchase the bulk of their inventory at wholesale values from used vehicle auctions. According to the Manheim Used Vehicle Value Index, wholesale used vehicle prices (on a mix, mileage, and seasonally adjusted basis) increased 1.51% month-over-month in July. This was a 5.1% increase from a year ago and the highest level ever recorded.

Manheim analysts attribute the increase to an abnormal summer bounce that started in June and strengthened in July. The unusual summer price appreciation is partly a function of a healthy economy, coupled with rising new car prices that constrict affordability for many consumers. These conditions have supported strong used-vehicle prices for over a year. The catalyst for even stronger price movement this summer is the fear of import tariffs’ leading to higher prices in the future. Higher prices and the related declining level of supply create a psychological feedback loop for consumers, encouraging them to buy now with the expectation that prices may be higher later.

Working the Pressure Points

As used vehicles continue to hold their value, and more consumers shop pre-owned, lenders are finding themselves in the dark when it comes to vehicle reliability. That’s why most lenders protect themselves with higher APRs in the pre-owned space. However, it’s also necessary to be competitive, and competing on APR is not a sure bet.

So, how can lenders address this pressure to reduce their average APR for pre-owned vehicles while also protecting their loan portfolios as a whole?

The answer lies in thinking outside of the traditional lending box.

Market-savvy lenders are now contemplating the benefits of offering complimentary consumer protection products on their loans to make their loan offering more competitive with both dealers and consumers, while at the same time protecting their loan portfolio.

Complimentary consumer protection products, such as a vehicle service contract or vehicle return protection, better enable dealers to increase their profit per unit with product upgrades. Offering products as part of the loan gives lenders the ultimate control for compliance measures while increasing the consumer’s perception of the higher value provided by the loan.

With more than 40 years of consumer protection product insights, EFG Companies works side-by-side with lenders to administer the right mix of F&I products, providing the greatest return to it and its dealership partners. Contact us today to find out how.

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