When negative equity bites back

March 31, 2023

Surviving the auto finance bubble burst!

The last couple years have been a wild ride for automotive dealers. We’ve dealt with an inventory shortage that shook the industry to its core, and as a result, cars were appreciating in value at lightning speed. While we are not entirely out of the woods yet with the inventory shortage, we are starting to see a correction in wholesale prices. 

In fact The Manheim Used Vehicle Value Index shows values are down 12.8% from one year ago. 

As these values have been dropping, many of us have been watching another storm that has been brewing, and it’s time we start talking about it. 

We all knew that the increased cost of buying a car over the past couple of years would lead to a negative equity bubble eventually, and that’s exactly what’s happening now. 

It’s time to prepare ourselves, because this is going to create challenges for us to secure financing for our customers and continue providing them with the best possible service. 

When we think about the impact of negative equity on finance applications, what we’re really talking about is lender advance rules and loan-to-value (LTV) calculations that determine how much the lender is willing to finance on any particular vehicle. 

Customers with high negative equity may not qualify for the financing they need to purchase their desired vehicle. Very often, when an application is declined, there is an assumption that the customer’s credit is involved, however it’s important to note that even a customer with an A credit application will be declined if the application is outside lender advance rules.

This is why it’s more critical than ever to make sure that your business managers have all the necessary tools to manage negative equity deals since these deals are complicated and can easily cost you a sale.

For a business manager to even have a shot at getting these deals done they have to have access to a number of things. 

They have to have access to lender vehicle valuations (MSRP on new and Canadian Black Book on pre-owned) and they have to have access to lender advance rules, which vary from lender to lender, and periodically change. 

Without access to these tools, finance applications with negative equity are guesswork at best, sometimes involving unnecessary discounts, vehicle changes and multiple submissions to the lenders creating inefficiencies for everyone.

As always, a good place to start in taking the bite out of negative equity is to set expectations with the customer. 

By being proactive and transparent with our customers on their equity position we build trust and increase the chance of finding a solution together to help them achieve their goals. Sometimes it can be as simple as a little extra down payment that can tip the scales in favour of an approval.

Other times we need a little more help. Sometimes, even when your business manager has access to valuations and is totally up to date on lender programs, some deals are just tricky, and tricky deals take time to find an approvable structure. 

The work is manual, tedious and slow, often resulting in a deal that is either less profitable than it could be, or lost altogether. The negative equity challenge has been a thorn in the side of dealers for many years, but with the current bubble that’s bursting in front of our eyes it’s time for efficient solutions. 

In response, what the market is seeing is the introduction of dealer software that does these advance calculations in less time that it takes your customer to refill their coffee. 

TPDesking managers who are concerned about negative equity can get real time responses on any vehicle the customer is considering so that not only are there no surprises in the box but that through collaboration with the customer they are selecting vehicles that are structured for success. 

Negative equity is just one of the challenges we face today. Although we don’t know what other surprises lay ahead, we can start planning for the challenges that face us today. This article is the start of a four-part series on the biggest challenges facing our business office. Watch for part two in the April issue of Canadian auto dealer. 

Source: Manheim Used Car Value Index: https://publish.manheim.com/en/services/consulting/used-vehicle-value-index.html

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