Almost exactly two years after the first pandemic shutdowns in the U.S. took effect, the Federal Reserve started raising interest rates in an effort to tamp down the inflation that took hold during that Covid crunch.

Supply constraints brought on by the pandemic, along with other economic factors, elevated the prices of goods and services to the point that the Fed took action, and it’s since raised interest rates 10 times, but that hasn’t been nearly enough to cut the consumer price index to its target 2%.

As a result of the rate increases, consumers have looked for ways to cushion the impact. Already facing higher than historically normal vehicle prices, despite the balancing effect of recently increased inventories, not to mention higher prices on many other goods and services, some are postponing car purchases.

Others who’ve been able to save money – and many Americans did so during the pandemic – are buying with cash instead of financing. Still others are opting to borrow from credit unions rather than through car dealerships because of their lower finance rates.

Industry experts and dealers have noticed a sizable increase in cash buyers in recent months. Cox Automotive saw the trend emerge as early as last summer, and it blames interest rates at “20-year highs.”

Automotive sales, finance-and-insurance and dealership consultant Max Zanan says he’s seen as much as a 300% combined increase in cash buyers and credit union borrowers purchasing vehicles at Northeast U.S. dealerships this year, a phenomenon he expects is happening nationally. Both types of transactions tend to result in limited revenue from the sale for the dealer because there’s either no financing or outside financing that the dealer gets no cut of because dealers don’t tend to arrange financing through credit unions.

Since the trend seems to be expanding and shows no sign of disappearing soon, dealers are left to make the best of the situation while it lasts. Though Zanan and other experts acknowledged that such purchases present a challenge for dealers, it’s nevertheless a challenge that creates an opportunity. Dealers just have to approach it in the right ways.

Products First

First, dealerships should focus on selling products to cash and credit union financing customers rather than trying to convert them to finance deals, although they shouldn’t discount the latter.

Some F&I managers write off cash buyers in particular, thinking they wouldn’t bother to buy any products, says F&I trainer Ron Reahard, president of Tennessee-based training company Reahard & Associates. He considers that an expensive mistake. For one thing, if someone can afford to pay cash for a car, they can afford to buy products to go with it.

“They buy all the same products a finance customer will if they see value in the products,” says Reahard, who used to work in a wealthy farming community with a high number of cash buyers. He cautions that the last thing a dealership should do is question a buyer’s decision to pay with cash.

“One of the biggest problems I see in the finance office is that someone in the dealership will say, ‘Why do you want to pay cash?’ If you’re going to question their judgement, that’s just insulting. You should stroke their ego – ‘That’s fantastic. We don’t see that very often.’ Make them feel good about paying cash, and then offer them products.”

Zanan agrees that products should lead dealers’ sales approach, especially as pandemic effects on the industry wane.

“As inventory is coming back, the importance of the finance department becomes as relevant as before the pandemic,” he says. “Unless your dealership has a really well-trained finance manager with impeccable closing skills, it will be very difficult for a car dealer to be profitable.

“This is no different than selling printers … They’re very cheap, but the ink is where it gets you … Prepandemic, you needed an excuse as a dealer to sell a car to sell FI products and bring back customers for the service department and maintenance and repairs.”

Dealers should position themselves for a leaner period by relying on strategy to maximize sales, says John Tabar, executive director of training for Brown & Brown.

“It’s probably a good idea to embrace those and look at (cash buyers) for the opportunity they are. Track your last rolling 90-day average on cash, see the performance on product penetration, and define the opportunity – what does it look like now, what could it be, and what will it do the rest of the year?”

Then a dealer can determine a strategy and track the results, he says.

Do Your Detective Work

Experts we talked to agree that dealers should work with cash buyers the same as they would buyers financing their vehicle purchases, and that should start with getting to know the customer and his or her needs.

Though true cash buyers may save money by avoiding interest payments, that doesn’t mean products wouldn’t appeal to them.

Cash buyers tend to be smart, Reahard says, and so a service contract could appeal to many of them.

“You could write a check for $7,800 for a repair, no problem, but no cash buyer wants to pay $7,800 for a $1,800 repair. They’re afraid of being ripped off. The great thing about a service contract is peace of mind.”

Secondly, cash buyers like to save time as well as money, Reahard adds. “With a service contract, you don’t rent a car, you just bring it in, and it covers substitute transportation.”

Tabar advises getting to know as much about each buyer’s situation as possible in order to present the most effective options. That includes learning whether they’ve bought from the dealer before, and if so, what the transaction looked like. Are they a service customer? How long have they owned their current vehicle? Look at their trade-in if it’s available.

“Take a minute to debrief Sales about the buyer,” he says. “Uncover their needs so they can address them in a personal way.”

There are some cash buyers who may not have money left over for products after their vehicle purchase, said Jonathan Perry, vice president of marketing and business development for F&I products financing provider Line 5, at last fall’s Bobit Dealer Group Industry Summit.

“I see spreading out vehicle service contract loans to get it as low as possible so people can still afford it,” he said. “If stuff gets more rough, the vehicle service contract will not be first thing they cancel.”

Finance Moves

Though converting cash buyers to financing customers can be challenging, experts say it shouldn’t be discounted. Tabar says it’s a “low-reward endeavor,” producing just a 10% or less return unless zero-percent financing is on the table.

But after the F&I office presents products for consideration, it should shift to potential financing, he says.

“Let them know what other (customers) are doing and share the reasons. Bring them to the other benefits out there.”

For instance, the buyer could instead invest their cash, offsetting the risk of a car loan with GAP coverage or signing on for an attractive lease deal, Tabar says.

They could also consider financing part of the vehicle purchase in order to shore up their credit score if they haven’t beefed it up recently due to their preference for cash payments, or finance through the dealership as a new line of credit for the same reason, Reahard says.

“Some of them have no installment credit,” he says. “They could need to borrow money in the future, and they want to borrow at the lowest possible cost.”

Be sure to couch the idea to the buyers more as, “How much money would you feel comfortable leaving in your investments’?” rather than, “How much would like to finance today?” to keep it on a positive note, Reahard advises.

Also make sure to learn whether a cash buyer is actually putting down cash for their vehicle, or if they’re securing financing through a credit union, Tabar says. If the dealer does business with that particular credit union, it could handle the customer’s credit application for them and thereby get a share of that part of the transaction.

Dealers can also use the tactic of buying down the finance rate on a car loan, Zanan says, prepaying the finance charge for loans taken out through outside lenders.

“The dealer is still making a lot of money on the car and can absorb the buydown. And when the customer finances through the dealer, there’s an opportunity for the finance manager to present a full repertoire of F&I products.”

Dealers can offer other perks to make financing more attractive to a cash buyer, including a better vehicle price, a free or low-cost warranty or maintenance plan, or free oil changes or car washes for the life of the vehicle, says Brian Moody, executive editor of Kelley Blue Book.

ABOUT THE AUTHOR: Hannah Mitchell is executive editor of Auto Dealer Today. A former daily newspaper journalist, her first car was a hand-me-down Chevrolet Nova.