A few weeks ago, the Federal Reserve Bank of New York reported record-high auto debt in the fourth quarter of 2016, totaling a whopping $1.16 trillion, up about 9% from 2015. The news sent alarm bells ringing, stirring up talk about the possibility of a bubble.
Lenders and dealers alike should not panic, but certainly need to take notice. With the Great Recession over, consumer confidence has grown and spending is on the rise. Overall underwriting standards have loosened, and we’ve seen lower credit standards in the automotive space. The report stated that about 32% of auto origination dollars went to consumer buyers with credit scores over 760. This is up from 696 in 2015. It’s also not uncommon for a buyer to finance a vehicle for up to six or seven years.
While more cars were sold in 2016 than ever before, what’s worrisome is that many of these car buyers may not have a record handling finances well. In the subprime space especially, car companies and their finance units underwrite approximately three quarters of all car loans today. So, when delinquencies begin to rise beyond a slight uptick, those lending to subprime buyers will likely pay the price. And, according to the report, more than 6 million consumers are at least 90 days late on car payments.
While we can expect to see some tightening up of approval standards among lenders, there are some other steps lenders can take to protect their portfolios, continue to increase loan volume and grow market share.
The use of consumer protection products, such as vehicle service contracts or vehicle return protection, is one area that can help lenders differentiate from the competition and manage delinquency rates, while also provide an additional stream of revenue.
Consumer protection can especially be helpful when dealing with subprime buyers. Consider what would happen if a subprime consumer suddenly experiences a mechanical breakdown. Do you think it is likely that this consumer could face paying for both the repair cost and the monthly loan payment? If you were that consumer, how would you prioritize? Most likely, you would choose to fix the car so you can get to work, but the trade-off is that your car payment will become late.
With vehicle return programs, consumers receive protection against unexpected life events, such a job loss. Consumers can return their vehicles to the selling dealership without experiencing a negative impact to their credit – and saving lenders from costly repossession expenses.
Lenders offering these products also differentiate loans with dealers by giving them the ability to further increase dealership profit through the sale of upgrades, as well as gaining the confidence and loyalty of consumers who wish to protect their investments.
