How the Chip Shortage is Creating New Opportunities in F&I

The car industry sits at a very uncomfortable crossroads in 2021. Most would agree 2020 was a wasted year from a profit and supply chain perspective and dealerships are still reeling from lost revenue. Now you have the chip shortage...a problem no one could have imagined just a year ago. Run out of cars? Halt production lines? Never.

But here we are. One of the many downsides of the chip shortage and the lack of new car inventory is that the used car prices have skyrocketed to some industry estimates of 22-25% YOY. Without new cars to buy, low mileage front-line ready trades have not been coming in and the used cars that do have favorable attributes are selling for higher than ever. Madness.

In any other world, F&I departments would be salivating at the prospect of more used autos coming across their desks. Those deals are primed for VSC, ancillaries, GAP, etc. But with prices pushing the outer limits of what some finance companies are willing to fund, are there still good opportunities for solid PVR and how can this price hike be turned into a ‘win’ for F&I?

‍Making the Case to Lenders

‍Depending on your preferred captives or banks, higher prices on used units could leave little room for F&I products. VSC’s and GAP would be the ideal products to wedge in there under the LTV caps by making the case that these two products help keep the borrower ‘liquid’ instead of paying out on high breakdown claims or the bank being stuck with a shortfall in case of a total loss or theft. If your store is in a position to negotiate these exceptions with your bankers (assuming they have not already raised their LTV’s), reach out and see what kind of room you have for aftermarket. It never hurts to ask.

Higher use car prices can make it tough for some borrowers to meet the LTV requirements and making the case to squeeze in some products that protect the buyer who is taking on a higher payment can help the buyer and keep steady profit/penetration flowing for your store.

‍Revisit Lifetime Powertrain/Max VSC

‍Not always a popular offering, lifetime powertrain and max coverage to 150-200K should be considered now more than ever. Prices are rising and car shoppers are having to cast a wider net for cars that meet their needs. They may have to go with a higher mileage unit...if your store offers some creative VSC products to accommodate these buyers, everyone wins. Lifetime powertrain can be private labeled to ensure they come back to your store for repairs giving the service department a boost.

These coverages often have favorable margins and for many who buy 2-4 year old cars, it can be valuable to help protect customers from big repairs while making payments.

‍VSC’s and GAP are Trending Up

‍In the first quarter of 2021, dealers and F&I administrators were reporting higher VSC and GAP sales and it makes sense….buyers are spending more on used cars but there is another reason that these strange times have uncovered.

Buyers are looking at the late-model used cars they buy now as a stopgap while waiting for the new car inventories to return to pre-pandemic normal levels. Customers know they will probably trade these cars sometime late next year for the new car they originally wanted and understand they have to keep it in good shape to increase the likelihood of a good trade-in value.

VSC, GAP and even appearance packages become important to keep the car in good shape for the future appraisal. And it’s not that these products didn’t sell before COVID or the chip shortage but now buyers are being more strategic about WHY they are willing to spend the money on them now.

The obvious benefit here is to leverage that fear in every customer and to paint the picture of how much more they will get for this car or truck in trade next year (assuming inventory levels recover in ‘22) if there are no dents/scratches and the car is in perfect mechanical shape.

Click here to reach out to the good folks here at truWarranty to learn more about how we can help your dealership get set up to tackle these crazy times in the industry with a comprehensive menu of F&I products, marketing support, and world-class claims administration. Isn’t it time to see what real F&I growth looks like?