Sales of finance and insurance products, especially vehicle service contracts, are expected to range from flat to slow growth over the next several months, especially if interest rates remain low.

Dealers’ sharper focus on presenting the value of F&I products, broader acceptance by consumers and a wider array of products all help promote sales, said executives of companies that sell the products and others.

“My expectation is for slow continued growth; I don’t see it jumping,” said Larry Dorfman, chief executive officer of EasyCare, an F&I provider and trainer. “Demand is as good or better than it’s ever been, especially when the customer is explained the value proposition of the extended service contract coverage.”

Vehicle service contracts are the most commonly presented and sold products in the F&I departments of independent dealerships, said Kate Eltringham, vice president of marketing at GWC Warranty, which specializes in service contracts for higher-mileage, used vehicles and other F&I products.

She expects sales to be flat to slightly up.

“A sizable portion of GWC’s business is with subprime customers, so we can confidently say that they are buying F&I products,” Eltringham said in an email response.

“Service contracts can be a phenomenal way for dealers to build customer confidence.”

EasyCare and GWC Warranty are independently operated companies owned by APCO Holdings Inc., of Norcross, Ga.

$77 billion business

F&I products is a $77 billion business, estimates an April 2016 report compiled by Colonnade Securities LLC of Chicago, an investment banking firm that specializes in mergers and acquisitions. The report notes that vehicle service contracts generated an estimated $28 billion in 2014.

Auto finance companies are among those Colonnade advises, as are administrators, sellers and payment plan providers of vehicle service contracts and ancillary F&I products. Colonnade’s report also notes that of the estimated $77 billion generated by F&I, used-car dealerships account for 29 percent of that revenue, used-vehicle sales at new-car dealerships account for 40 percent and new-vehicles sales account for 31 percent.

It also estimates that half of all of used-vehicle purchases at independent used-car dealerships include service contracts.

GWC’s Eltringham said quality F&I products help protect an independent dealer’s reputation and increase repeat and referral business, which drives long-term profit.

Though many lenders have publicly said they are tightening their subprime lending standards and interest rates have inched up, she expects subprime customers to continue to participate in F&I sales.

“… Some lenders are backing off their subprime business, but that’s not to say that there aren’t still a variety of reliable lending sources available for these customers,” wrote Eltringham.

About interest rates

Lloyd Trushel is chief operating officer and co-founder of The Consator Group in Tampa, Fla., which owns a service contract company and provides dealers with F&I training and customized F&I programs. He believes service contract penetration “will trend downward” if there is an appreciable upward trend in interest rates.

Lenders, he said, have payment-to-income guidelines and will approve a certain amount of a customer’s gross monthly income as a payment. For example, if interest rates rise and a payment that would have been 12 percent of monthly income increases to 14 percent of monthly income, consumers might have to buy “less car” and there might be fewer opportunities for back-end sales, including service contracts, he said.

“The interest rate is going to influence the overall payment and the payment is going to be restricted, particularly on subprime,” if interest rates increase, Trushel said.

Larry Pappalardo, auto dealer leader at Equifax, said some lenders take into account the price of a vehicle and price of F&I products when making loans to subprime customers.

“All the deals are different, but they do account for that,” Pappalardo said. “There’s the price of the car and they anticipate tax, title and warranty.”

Ryan Williams, president of Fidelis PPM, in Scottsdale, Ariz., has seen “dramatic increases” in sales of prepaid maintenance contracts that his company developed.

He said dealers and lenders are eager for subprime customers to buy prepaid maintenance contracts for the same reason they want them to buy service contracts.

“If the car doesn’t break, they’re more likely to make their payment,” Williams said. “If there is room in the deal, generally, subprime customers will buy most of the time.”

At new-car dealerships

The National Automobile Dealer Association’s annual financial profile of new-car dealerships, NADA Data, pegged service contract penetration for used-vehicle sales at new-car dealerships in 2016 at 48.6 percent, up from 40.7 percent in 2011.

Last year, service contract penetration for was 43.7 percent for new-vehicle sales, up from 38.4 percent in 2011, according to NADA Data.

Steven Szakaly, NADA chief economist, said income from F&I and service contract income is important to new-car dealers because profits on new-vehicle sales have dwindled for more than a decade.

And besides, consumers “actually like these products,” Szakaly said.