Finance   or Cash?

These days it seems to be harder and harder to convert cash buyers to finance their automotive purchase.  It would seem logical that when interest rates are low to borrow money, people would be standing in line to gobble up the opportunity.  The challenge this presents is that when rates are low for borrowing, they are also low for investment yields.  Many people feel that it is wasteful to keep their cash in investments when their gains on the investment are at an all-time low.  As Business Managers/Financial Service Managers, we don't want to imply to our customers that we are investment advisors because that's a whole career in itself but we can give some solid, sound advice.  Typically, people are reacting to fear that they hear and read about in the media.  It's our responsibility to remind the cash customer of a few valuable facts, ultimately they will make their own decision but these points are important refreshers:

• Personal Line of Credit  A customer using their line of credit to purchase a vehicle is not a true cash customer.  It's your job to find out whether they have the cash sitting in a bank account, if it's funds invested that are being collapsed OR if it's a personal line of credit.  There are many reasons a customer should not purchase a vehicle with this resource.  Consider these:

• A personal line of credit is secured by a customer's tremendous banking track record thereby their signature is all the bank needs to be confident that the debt will be repaid OR, as with most lines of credit these days, they are secured by the customer's home.  It's better security for the bank. The value of real estate is dropping.  If a line of credit is secured by real estate and the bank believes that the value of the home now jeopardizes the amount they have extended against it in credit, they can call that line of credit as DUE and PAYABLE any time.  If the borrower doesn't have the cash accessible to payout the debt in full, the amount owing on the personal line of credit will be rolled into a monthly repayment term at a personal loan interest rate as deemed by the bank. 
  
• These financial instruments were originally designed by the banks to keep their clients committed to them for their future financial needs; to have funds readily accessible for sudden events that are time-sensitive and may otherwise be challenging to get a loan for, like emergency home repairs (the roof is leaking!), an unexpected family emergency (maybe for an illness or aging parents), or for an amazing investment or business opportunity that has suddenly presented itself.  Customers should keep their personal line of credit intact and available should they need the funds for any of these reasons.  If a customer qualifies for a collateral based loan (the bank has an asset as security - like an automobile - so they have something they can take ownership of for resell should the client not fulfill their repayment obligations), they should take advantage of that finance opportunity and preserve their line of credit for non-collateral purchases like those mentioned.
  

• Cash Is KING!  Ask your customer if they know who was successful following the Great Depression of 1929 and why?  It's a simple principal, as consumer spending dropped, company values declined too, real estate values fell, the stock market had already plummeted, and so on.  Those who had cash were KING!  When the price of everything was in the gutter, the cash holders bought everything at a massive discount and waited for the economy to recover, increasing their asset values multiple times the purchase price.  So how does this relate to your cash customer?  Well we never want to insult anyone's intelligence and you may just come across someone who is a professor about the Great Depression.  Indeed some will know more about this topic than you and I together.  For the average Canadian though, they will agree with you that the purchase of products and services at a massive discount and selling them at retail is a fundamental business practice.  None of us have a crystal ball.  So, to be conservative, consumers are wise to keep their cash,take advantage of the low-interest rate times, and if they are ever in a need to remove themselves from the monthly obligation, their cash is still intact.  If on the other hand they are propositioned with an amazing opportunity, the cash is available for that purpose.

• Make More Money  This is a simple principal and worth mentioning although many of you and your customers already apply it.  For those who are newer to the Business Manager/Financial Services Manager position, this is a fundamental you need to know.  The manufacturers are still offering some dynamite interest rates on new vehicle purchases.  If your cash customer takes that financing offer and stashes their cash into a secure deposit, GIC or other instrument, they can earn more interest on the money they have tucked away than what they are paying on the automobile loan.  In a real world scenario, lets say that your manufacturer is offering 1.9% financing on the customers vehicle model of choice.  The cash customer can take the sum of that total vehicle purchase, the amount they would otherwise write you a cheque for, and invest it into a GIC.  A 5-year term will get them about 4%, maybe more if they shop around.  Do some research on your own to compare your store manufacturer interest rates and the investment rates offered in the marketplace.  Make some phone calls to banks and ask the questions.  Knowledge is powerful.