F&I offices are facing more cash deals

The percentage of "cash deals" has grown over the past year, a trend that can eat into auto dealership finance-and-insurance revenue.

Dealerships earn money from arranging indirect loans between lenders and consumers, revenue they can't collect when a consumer has cash, a cashier's check or a personal check in hand. Cash deals might also jeopardize finance-and-insurance product sales because consumers typically finance F&I coverage within auto loans. If a customer is paying cash, the finance manager must persuade the consumer to pay those premiums out-of-pocket or take out a loan for the coverage.

G.P. Anderson, finance manager at Thielen Motors in Park Rapids, Minn., recalled a run of 38 deals in 2022 that either involved either cash or outside financing.

"It's like you're losing your brain because you don't get paid on a cash deal in your brain," he said. "And what happens is 99 percent of the finance people, they just get absolutely hellbent for leather."

Cash deals make for a stressful time, he said.

Anderson said he instead tells himself the cash buyer represents "another opportunity," welcomes them warmly and provides a different experience than the "adversarial" relationship that customer might have experienced from other dealerships trying to change the source of funds for the transaction.

"And they just melt," Anderson said.

The cash buyer leaves happy and produces an excellent customer satisfaction score, he said, describing this approach as an example of a finance manager focusing on what can be controlled.

Information provider statistics offer different perspectives on the growth of cash deals over the past year.

F&I menu and analytics provider StoneEagleMETRICS found a combined 10 percent of new- and used-vehicle transactions in March were cash deals with no outside financing, up from 8.3 percent a year earlier.

Experian put the proportion of new vehicles with financing at 81 percent in the fourth quarter of 2022, down 4 points from a year earlier. This suggests the percentage of cash buyers grew to 19 percent of transactions from 15 percent, according to Experian spokesperson Jordan Takeyama.

Forty percent of used vehicles carried financing during the fourth quarter, down from 41 percent a year earlier, according to Experian. This suggests cash deals rose 1 point to 60 percent of the used-vehicle market.

According to J.D. Power, 24 percent of new-vehicle transactions at franchised dealers during the first quarter of 2023 involved "cash type of sale" deals, up from 20 percent a year earlier. However, J.D. Power's cash statistics can't distinguish between true cash deals and customers who raised the cash with a direct loan from a third-party auto lender such as a credit union, a spokesman said.

J.D. Power Data and Analytics Vice President Tyson Jominy called it a "massive step up in Q3 last year that has continued." He said cash or cash-like deals have grown nearly 75 percent since the first quarter of 2020.

Some dealerships are encountering an even higher proportion of new-vehicle cash sales.

"We're seeing a good bit of it on the new-car side," Marvin Eleazer, finance manager at Langdale Ford in Valdosta, Ga., told Automotive News in March. "And some of those things are $80, $90, $100 grand."

Eleazer said trying to estimate how many cash deals are being done at Langdale Ford would be complicated by buyers with outside liens — such as a bank loan — on the vehicle. But he estimated unencumbered cash deals made up about 50 percent of Langdale's used volume and 35, "maybe 40," percent of new-vehicle transactions.

"What's causing that is that so many people have gotten sticker shock" at the interest rates available, Eleazer said.

Customers aren't aware of the rise in interest rates that has taken place since the first quarter of 2022. When a customer whose last loan had a 2.9 percent APR is offered 7.9 percent today, "they're about to lose their mind," he said.

As a result, customers opt to pay cash instead.

"It'll level out," Eleazer said. "It always does."

Interest rates today are like those before the 2008 financial crisis, he said, a point he also makes to customers.

The Fed had kept its internal benchmark rate target at 5.25 percent throughout 2007 until September of that year, when it began to fall to what would ultimately be a 0-0.25 percent target by the end of 2008. Conversely, the Fed's target rate had risen from 0 to 0.25 percent from the start of 2022 to 5 to 5.25 percent in May 2023.

Bob Parry, finance director at Tyrell Auto Centers in Cheyenne, Wyo., said he has seen a trend of cash buyers for both new and used vehicles, which he attributes to higher interest rates on car loans. He estimated in March that customers brought cash about 30 percent of the time in both new- or used-vehicle deals.

But Parry said he thought this cash derived from a loan rather than savings — just not an auto loan.

"When you see the cash, I think people are pulling it out of their home," Parry said. "I don't think there's that many true cash buyers in this market."

Parry said he believes financing a vehicle was a better bet for consumers than cash, and he financed all of his personal vehicles. "The worst thing" one could do was pay cash for a depreciating asset like a vehicle, he said.

"Why not use the bank's money and put GAP insurance on there and protect that?" Parry said. "Leave your cash in the bank."