Dealing with the Growing Challenge of Negative Equity: Solutions and Strategies
I’ve been reviewing CRM records daily for several of my dealer clients, and a concerning trend is becoming increasingly apparent: many of the leads and walk-in traffic we’re seeing are customers with significant negative equity. This is largely due to the inflated vehicle prices during the COVID-19 pandemic when customers paid MSRP or higher for new cars and elevated prices for used cars due to supply shortages.
This problem isn’t going away anytime soon, and it’s something that needs to be addressed not only by dealers but also by the manufacturers of vehicles. Dealers will need strong support from the OEMs to ensure that we can help our customers effectively and create a win-win scenario for everyone involved.
As we navigate this challenging landscape, it’s crucial for dealerships to proactively address the issue of negative equity and find ways to assist our customers who are in this situation. Here are a few strategies I recommend:
1. Leverage CRM and Equity Identification Software:
Dealerships should utilize the software within their CRM systems to identify customers who still have equity in their vehicles. These customers can be targeted for marketing campaigns, outbound phone calls, and personalized offers that encourage them to trade in their vehicle while they’re in a positive equity position.
2. Target Customers with Improved Credit:
Another key opportunity lies with customers who originally financed their vehicles at high-interest rates due to lower credit scores. Many of these individuals may have improved their credit over time by making on-time payments. Identifying these customers and offering them the chance to refinance or upgrade to a new vehicle with a much lower interest rate can be a win-win for both the customer and the dealership.
3. Refocus on Leasing:
There needs to be a renewed focus on leasing as a viable option for customers. Leasing brings customers back into the dealership every 24-36 months, compared to long-term finance loans of 60, 72, or even 84 months. To make this shift, dealerships will need support from OEMs, and sales staff will need to be retrained on the benefits and process of leasing, which has somewhat been forgotten in recent years.
4. Increased Risk Tolerance from OEMs and Captive Finance Companies:
To effectively manage the negative equity problem, OEMs and their captive finance companies will need to increase their tolerance for risk in their loan portfolios. This includes allowing for higher loan-to-value ratios (LTVs) and accommodating customers with poorer credit scores, which will be essential in helping customers move out of negative equity situations.
5. Addressing Negative Equity Directly:
For customers already facing negative equity, it’s essential to offer solutions that can help them. This might include manufacturer incentives or rebates, flexible financing options, or even educational resources to help them understand their options and make informed decisions.
6. Continuous Customer Engagement:
Maintaining a strong relationship with customers, especially those in negative equity situations, is vital. Regular communication, transparency, and presenting them with solutions that address their financial concerns will build trust and loyalty.
The reality is that we’ll need collaboration between dealers and manufacturers to successfully navigate this issue in the long term. By working together, we can help our customers overcome negative equity while driving growth and sustainability for our businesses.
I’d love to hear your thoughts and feedback on how you’re handling this issue at your dealership. What strategies have you found to be effective? Let’s discuss!
