July 23, 2007 – Why we should be swayed from no-interest loans
July 23, 2007
Filed under Columns
This is a hard statement to make for its obvious financial impacts, not to mention the difficulty it can bring to the showroom floor. But it’s one worth making.
The no-interest loan could be among the biggest culprits in our industry, and others, for what appears to be a slowing of new unit sales and should in the future play a reduced role in our industry’s sales.
That’s not exactly an original thought. In fact, industry consultant Peter Jones’ discussion on F&I at the recent American Suzuki Motor Corp. dealer show in Las Vegas touched briefly on the topic.
Jones advised dealer principals to pass this thought onto their sales staff: They are there to sell product, not payments. Why? A couple of reasons, most importantly the no-interest loan often leaves consumers with very little, if any, equity on their new vehicle two to three years after the purchase. And at that point, it’s not uncommon for the consumer to be looking again at buying a new, improved machine. But with little or no equity, the trade-in value of their vehicle probably won’t cover what’s left on their existing loan, meaning any shot at buying another new unit takes a serious hit.
In other words, no-interest loans can result in a short-term gain with likely long-term pain for the dealership. Another reason to buy into Jones’ statement that the sales staff should be selling product instead of payments is the more obvious one: It’s likely the shine and polish of the new vehicle are going to be bigger buying incentives than a reduced monthly payment.
Of course there are obvious reasons why many in the industry would see this view as counterproductive. After all, no-interest loans offer an avenue for many consumers to purchase something that they otherwise couldn’t afford. That’s particularly the case for the younger demographic, which often has a limited salary and little or no credit history. And this younger group is key to one of the industry’s growth markets, the sport bike segment.
Plus, thanks in no small part to the car industry, no-interest loans have become engrained in the consumer’s mind as an expected shopping bonus, kind of like the gift box you receive with your holiday-time purchase. We saw it again in late June and earlier this month as GM, Ford and other auto manufacturers offered a limited-time, no-interest loan to clear inventory.
The anti-no-interest loan argument also delves into an area that can be particularly vexing for retailers who rightly question: Isn’t our job about marketing and selling products and not about balancing our customers’ checkbooks? Obviously, the answer to that question is yes, but with a notable asterisk. Any successful business is as concerned about its long-term health as its immediate challenges. To focus on one at the other’s expense is asking for trouble.
And, in fact, it’s a legitimate question of whether U.S. retailers in general have not scrutinized the consequences of their short-term objectives close enough.
Case in point: the American Bankers Association’s recent findings on U.S. credit delinquencies. The report shows delinquent accounts increased in the first quarter of 2007 to levels that have not been seen since 2001. The statistic is a composite of eight different installment loan categories, six of which rose in the first quarter. Among those loan categories that are on the upward trend is the number of home equity delinquencies, which is at its worst level since the third quarter of 2005.
“There are still signs of consumer financial distress, which will continue throughout most of this year as the worst of the housing problem works its way through the economy,” stated James Chessen, the American Bankers Association’s chief economist, in a press release.
Consumer financial distress is about the worst phrase that retailers can think of. Put credit-challenged in front of that phrase and suddenly things are not only looking poorly for this quarter, but for many quarters to come.
That’s why the no-interest loan can be such a time bomb for the powersports industry.
It may not hit with such force on the GMs and Fords of this world because the auto industry does business with 90 or more percent of U.S. consumers. But when an industry that deals with probably less than 10 percent of U.S. consumers on an annual basis is dealing with more than its share of customers shackled to poor decisions, then even a difficult statement is worth sharing and considering. psb
Neil Pascale is editor of Powersports Business. He can be reached at firstname.lastname@example.org.