The Role of Financing
WQP: Why should dealers who already take credit cards consider adding a financing program?
Andrea Swiney: The more payment options dealers can give to customers, the more likely they are to find one that works to close the sale. Not all customers have credit cards, and even if they do, they may not have the available credit to make a large purchase. They may also not have terms as favorable as a finance program. With financing, dealers can offer interest-free or payment-free periods that customers typically can’t get on credit cards.
WQP: What are some of the main differences between a financing program and consumer credit cards?
Swiney: Having financing available allows dealers to sell on payments. Dealers can’t know what the monthly payment will be for a customer using a credit card; however, they will know all the terms for the financing program and can accurately quote a payment. It is much easier for customers to commit to $75 per month than it is to commit to a $3,500 expenditure.
In addition, most major credit card companies have recently increased their minimum payments to comply with changes in federal guidelines. So, many people who were paying a 2% minimum payment on their card before may now be paying as high as 4%. Most finance programs do not fall under these new guidelines. On a $3,000 sale, a charge to a credit card might initially cost the customer $120 per month, but on financing, it may be as low as $60 per month.
While credit card companies increased minimum monthly payments, the federal government also reformed the bankruptcy code and made it more difficult for customers to discharge their debts under bankruptcy protection. Many dealers are finding that the combination of the higher required monthly payments and the bankruptcy law changes is making customers more wary of charging high-ticket items to their credit cards. Having a financing program in place can help dealers close sales to those customers.
WQP: What are some of the advantages of a financing program?
Swiney: Again, dealers can sell on payments and customers won’t be subject to the new credit card minimum payment rules. But that’s not all.
Most dealers genuinely care about their customers. Some are hesitant to put them into a finance program due to the interest rates offered by finance companies. They say that if the interest rate on the customer’s credit card is lower, it must be better. Many credit cards, however, have variable interest rates tied to the prime rate. As prime rates have continued to rise, these once low-rate cards have seen their rates top 20%, in many cases. And buried in the fine print of many credit card agreements is a clause known as “Universal Default.” This clause basically states that if the customer is late on any bill, the credit card company can raise the APR to the default rate, which is typically 29% or more. In many cases, the credit card company can do this even if the customer has never been late on that particular card. Finance programs that offer fixed rates and fixed terms can give the customer peace of mind, making them more likely to buy. They will know that their bill will be paid off in X number of months and that their payment and interest rate cannot be raised.
WQP: Why should dealers look into offering financing programs to their customers?
Swiney: Even if dealers believe it is the customer’s responsibility to worry about all that, there is still a compelling reason for dealers to use financing—promotional programs.
Virtually all finance companies offer “same as cash” or “deferred payment” promotions that dealers can use to drive sales. These programs give customers an interest-free or payment-free period in which they can repay the contract without penalty. For dealers, advertising a “six month same-as-cash” or “90 days no payments” special can help spur sales to on-the-fence buyers. Dealers pay a fee to the finance company to run these promotions, but in some cases, that fee is lower than what the dealer would pay to process a credit card. Many dealers pay 2 to 2.5% transaction fees to process credit card payments. Some finance promotions have a cost of 1% or less to the dealer. By offering financing, everyone wins: the dealer saves on credit card fees, the customer gets a payment-free or interest-free period, and the finance company finances the sale. By working hand-in-hand with a finance company, the dealer can be on the road to more sales and higher profits.