How Dealers Can Remain Competitive Despite Rising Interest Rates

May 22, 2023

The automotive industry is highly dynamic and competitive. Auto dealers face a constant battle to stay ahead of the curve. This is particularly true when faced with rising interest rates. To cope with rising inflation, the Fed has raised the federal funds rate from near zero to 5.25% in just 1 year. As a result, auto lenders have been forced to increase their rates, making the cost of financing a concern for both auto dealerships and customers alike. 

However, amidst these challenges, auto dealers can adopt strategies to remain competitive, from providing exceptional customer service to investing in technology. Tactics such as these are invaluable in helping dealerships continue to grow and thrive in this challenging environment.

Understanding the Impact of Rising Interest Rates on Auto Financing 

According to experts, the average interest rate on a new car loan rose to 8.95% in March, up from 5.66% in March of 2022. The rate for used cars spiked to 11.3%, up from 7.7% the year prior. With a one percent increase on an auto loan adding roughly $20 per month to a car payment and amounting to thousands of dollars extra over the life of the loan, these rate increases are significant. And not surprisingly, higher rates are knocking many potential car buyers out of the market. In fact, automakers will sell approximately 14 million new vehicles this year, some 3 million shy of what was typically sold annually pre-COVID. 

What this means for auto dealers is that it is critical to employ strategies that differentiate their services and support continued growth despite rising interest rates. 

Offering Competitive Financing Options 

Even with rising interest rates, dealers can offer potential customers competitive financing options. For example, dealers can accomplish this with: 

  • Negotiating rates. Finance managers typically can negotiate interest rates and loan terms on their customers’ behalf, allowing them to find the best rates based on the customer’s current financial situation. 
  • Manufacturer financing programs. Dealerships can take advantage of special financing programs and incentives to promote sales. As sales decline, manufacturer incentives become more commonplace. 
  • Inhouse financing. In-house financing allows dealerships to provide financing directly to customers without having to rely on third-party lenders, providing greater flexibility to assist customers with varying credit profiles. 
  • Multiple financing options. Provide customers with a range of financing options from different lenders, allowing them to compare rates and terms and choose the option that best meets their needs. 

Providing Exceptional Customer Service 

Rising interest rates present an opportunity for dealerships to focus on customer service and explore ways to improve the experience. Some ways to improve the customer experience include: 

  • Personalizing experiences. One way to improve the customer experience is by incorporating personalization. Customer-facing staff should understand customer needs, preferences, and budgets. Customers should be addressed by name, whether in person or through digital channels. Dealerships should offer multiple communication channels, such as email, phone, live chat, and social media platforms. Investing in a CRM system can help manage and track interactions. 
  • Training staff. Staff should receive training in product knowledge, customer needs, communication, and problem-solving skills to better serve customers. 
  • Transparent pricing. Building trust through transparent pricing, including vehicle costs, financing terms, and additional fees helps build long-term relationships.
  • Improving processes. Streamlined processes can greatly improve the customer experience. For example, reducing paperwork and minimizing wait times can make the buying process as hassle-free as possible. 
  • Post-sales support. Continue to provide support after the sale to increase customer satisfaction. Some examples include scheduling service appointments and helping with vehicle features. 
  • Customer feedback. Actively seek out customer feedback through surveys or reviews to identify areas for improvement. 

Building Strong Relationships with Lenders

Building strong relationships with multiple lenders, particularly for high-level financial staff at dealerships, can help dealerships offer customers a range of financing options at competitive rates. Some ways to approach this process include: 

  • Researching lenders. Conduct research to identify reputable lenders that offer competitive financing options. Consider factors such as loan terms, interest rates, the loan approval process, and customer credit requirements. 
  • Establishing communication processes. Identify the point of contact and maintain regular communication to discuss applications, financing options, and any issues that may arise during the loan process. 
  • Building trust. Demonstrate professionalism by submitting all required loan documentation on time. Ensure that all documents are complete, accurate, and comply with applicable regulations. This helps to build confidence and trust in the dealership’s operations. 
  • Maintaining a good credit standing. Pay invoices on time, manage cash flow effectively, and minimize outstanding debts. A positive credit history makes lenders more willing to work with a dealership in the future. 
  • Developing mutually beneficial partnerships. Discuss and explore ways to support each other’s business growth. Consider collaborating on market initiatives to yield benefits for both sides. 
  • Seeking feedback. Ask for suggestions on how to improve the loan application process and the overall partnership. 

Investing in Technology

Technology can give auto dealers a significant competitive edge by improving nearly every business process. For example, investing in technology can improve: 

  • The customer experience. Automation allows dealerships to provide more personalized customer experiences. For instance, a CRM system can track customer interactions and preferences, allowing dealers to provide tailored recommendations and services. 
  • Inventory management. Inventory management systems can help dealers track vehicle availability, automate reordering, and optimize inventory levels, reducing carrying costs and ensuring that popular models are available. 
  • Service efficiency. Digital tools such as service scheduling and maintenance tracking ensure faster turnaround times, higher customer satisfaction, and a stronger competitive advantage. 
  • Online visibility. Digital marketing tools help dealerships to reach more customers and gather and convert more leads. 
  • Analytics. Data analytics tools provide insights that help dealers identify areas for improvement, optimize marketing and sales processes, and make data-driven decisions that make them more competitive. 

Offering Value-Added Services

Value-added services set auto dealers apart and incentivize customers even in down markets. The types of value-added services that a dealership offers can vary significantly based on the needs and preferences of the target customer base. However, some common examples include: 

  • Online buying and home delivery. Many of today’s customers appreciate digital car buying experiences. This saves time and provides a hassle-free car-buying experience. 
  • Maintenance packages. Pre-paid maintenance packages or discounted service plans incentivize customers to choose a dealership for future servicing needs. 
  • Customization. Many customers enjoy personalizing their vehicles. For example, upgrading audio systems or installing aftermarket accessories. 
  • Concierge services. Services such as vehicle pickup and drop-off or providing loaner cars enhance customer satisfaction. 
  • Rewards programs. Rewards systems can incentivize customers to choose a dealership for future purchases or services. For instance, discounts on future purchases or priority access to new vehicle releases. 

Staying Up to Date on Industry Trends 

Finally, staying abreast of industry trends can yield many benefits, including: 

  • Anticipating customer expectations. Dealers can understand what customers are looking for and adapt their strategies to meet these expectations, differentiating them from competitors. 
  • Technology. Being aware of both new vehicle technologies and dealership solutions helps dealers to make informed decisions about their inventory, services, and business processes. 
  • Evolving marketing strategies. Staying up to date with the latest marketing approaches allows dealers to reach their target audience effectively. 
  • Key partnerships. Changing industry trends often lead to new opportunities for strategic partnerships. For instance, the increased popularity of electric vehicles may lead to partnerships with charging stations. By staying up to date, dealers can identify potential partnerships that expand their service offerings and/or expand their customer base. 

DCG Understands and Adapts to Industry Challenges

At Dave Cantin Group (DCG), we understand the challenges that rising interest rates can pose for auto dealers. With hundreds of successful acquisitions and billions of dollars in transactions closed, we have helped countless clients to navigate a broad range of obstacles and achieve strategic growth. Our industry-leading Acquisitions division includes a dedicated team of M&A attorneys, accountants, former OEM executives, and former dealers, and we have successfully represented a diverse range of companies on both sides of the negotiating table.

Contact the Acquisitions division of DCG to speak directly with an automotive M&A specialist and learn how our expertise can help you get the most out of your next transaction.