The auto finance industry is stable now, but it’s also probably not growing at record-breaking figures in 2017, which will put lenders in the unfamiliar scenario of only moderately improving, said Lou Loquasto, vice president of the auto lending and dealership verticals at Equifax.
“Things got bad [after the great recession], so we tightened things up considerably,” Loquasto told Auto Finance News during a meeting at the National Automotive Dealers Association Convention & Expo. “Now that we’re at this house-in-order stage, and we know growth isn’t going to be significant — it’s not going to go up 10%, but it’s not going to go down 10% — so now, what kind of things can you do to fine tune the dealers that you do business with?”
However, there is still risk of a downturn. Fourth quarter earnings reports overwhelmingly show rising delinquency rates, and lower origination volumes for auto lenders despite record car sales in 2016 spurred in large part by incentives around the holidays.
Depreciating used-car prices are perhaps the most worrisome figure, Anil Goyal, senior vice president of operations at Black Book said. Prior to the recession, depreciation rates hovered around 16% to 18%, and if the rate goes higher than that, the industry might be in trouble.
“We had a 17.3% depreciation rate [in 2016],” Goyal told AFN. “We’ve been reporting that the market is going down and it’s going down at a much faster rate than in the past — the market has already turned.”
Loquasto agreed, saying “if used car values continue to drop, that’s where you’ll see higher than expected losses,” especially if current projections are wildly off.
Still there are ways to improve modestly without taking on more risk he says. Focusing on dealer relationships and rooting out dealer risk is one of the best things lenders can do he said.
Data can help identify the dealers in a lender’s network who are performing well and incentivizes them to do more business by lowering rates or offering special programs. On the other hand, dealers who are not performing as well may not get those offers.
Improving underwriting through alternative data is another way lenders may look to expand their business without increasing risk, he added.
“If you’re paying your bill on something we want you to get credit on that and historically that was limited to a credit card, a store card, a mortgage or a car loan,” he said. “Now, with alternative data you bring in utilities, your cell phone, and your ATV.”
