F&I Products Are Providing Relief to Used Car Buyers As Inflation Reaches 40-Year Highs

Every penny counts these days and as inflation and used car prices increase, more and more consumers are choosing to protect their investment, through F&I products.

Inflation is at a 40-year high and climbing

The automotive industry has weathered many storms from the financial crash of 2008 to more recently the COVID-19 pandemic. Today, automobile dealerships are facing many new challenges such as the push to offer electric vehicles, online digital sales, inventory shortages, and inflation. Despite the U.S. Treasury department’s original claims that inflation was thought to be transitory in 2021, it is clear that not only is inflation not transitory it had reached a 40-year high.

According to U.S. Labor and Statistics, new vehicle prices have increased by over 10% from August of last year, and Used vehicle prices have increased by almost 8% from last year.

According to the Bureau of Labor and Statistics, the overall Consumer Price Index (CPI) rose again in August of 2022 from last year with non-seasonally adjusted CPI sitting at 8.3%. According to the U.S. Bureau of Labor Statistics, real wage growth for the same period has decreased 2.8% when adjusted for inflation and seasonality. This means less buying power for the consumer as they spend more on food and energy.

Light at the end of the tunnel

During COVID-19, automobile dealers dealt with part shortages and inventory shortages; however, demand remained high. Inflation was low, interest rates were low and consumers and companies had stimulus money and interest rates were low. In other sectors, manufacturers increased production to meet demand, and companies placed larger orders for goods. As inflation and interest rates continue to increase, demand is beginning to slow. Manufacturers in some sectors are beginning to discuss if now is the time to decrease the price of goods when inventory levels are high and demand is beginning to slow to avoid discounting, transportation expenses, and warehousing costs.

Vehicle Inventory on the rise

We are beginning to see dealers’ inventory levels increase due to new vehicle production and a slight dip in demand. Globally though, production of new vehicles is set to decline. With the war in Ukraine and COVID-19 still shutting down factories in China, production is expected to be cut by up to 5 million vehicles for 2022-2023.

Increased years of ownership

The COVID-19 pandemic has forced many consumers to reconsider their auto-buying behaviors. Prices of used vehicles have dramatically increased within the past 2 years, primarily due to supply chain disruptions and microchip shortage constraints, which have slowed the production of new automobiles. This has led to fewer new cars in the market and has more consumers turning to the used car market for their next vehicles. Supply-chain shortages, inflated prices, and flexible work schedules have inspired more consumers to keep their vehicles longer than ever before. According to CBSnews.com, the average age of vehicles on the road has been steadily increasing for the past 20-plus years and this has been accelerated due to the pandemic. The average vehicle on the roads today has now climbed to an all-time high of just over 12 years of age. As we continue to experience higher than normal levels of inflation, this trend is almost certain to continue.

F&I products more appealing to consumers

With rising years of ownership and rising prices of used vehicles, customers are opting to purchase more vehicle protection products with longer-term limits. Many of today’s F&I products are created with a customer-first philosophy and dealers are finding ways to help protect their customers from costly repairs. 

Guaranteed Asset Protection or GAP: GAP may help pay the difference between the fair market value of the vehicle, at the time of the accident and the outstanding loan balance. With limited availability and rising inflation, the average selling price of new and used vehicles is at a premium. With GAP, consumers are less exposed.

Vehicle Service Contract or VSC: A VSC protection program can cover the repair of certain vehicle components after the dealer or manufacturer’s warranty has expired. What are the benefits of a VSC program? Consumers can purchase a program based on term or milage and many VSC companies offer generous terms on new, used, and older vehicles so consumers can select the best coverage for their short-term or long-term needs.

Tire & Wheel: If you’ve ever gotten a flat tire caused by a road hazard (glass, nails, or potholes), then you know how expensive today’s tires and wheels can be. Tire & Wheel programs can vary in coverage and can offer flexibility to today’s buyers. Most cover EV’s which can have more expensive tires due to higher gross vehicle weight.