Connected cars: A game-changer for loans and leases

© Can Stock Photo / dolgachov

In early 2020, the rise in popularity for mass transit, ridesharing, and subscription services were calling into question traditional ownership models. But the pandemic has changed consumer preferences once again.

A Sept. 2020 McKinsey & Company survey indicated that “a third of consumers value constant access to a private vehicle more than they did before COVID-19, and half say they are open to extending their use of private vehicles beyond traveling in order to connect with the outside world in a safe way.”

Consumers who opt for newer cars will find their technology-rich functionalities appealing, especially as they spend more time in their vehicles. It’s estimated that by 2021, 98% of new vehicles sold in the U.S. will have internet connectivity, according to a 2017 study by ABI Research. The rollout of 5G networks will only further enhance the value of vehicles capable of connectivity.

Each new connected vehicle purchased or leased is, by design, programmed to share data with manufacturers, and generates volumes of usage data that can be analyzed to provide previously unavailable insights into consumer preferences and vehicle usage.

That data will also change the way loans and leases are offered and managed. With access to this information, lenders will be able to: target consumers more accurately based on a better understanding of demographics, vehicle usage and travel patterns; replace standard lease agreements with a wide variety of leases using parameters such as vehicle type, calculated resale value, typical usage and consumer profiles; calculate residual value more accurately using vehicle usage data acquired and analyzed from the duration of the lease; and help consumers be more proactive about vehicle maintenance in order to protect residuals.

Data acquired from connected cars will also provide additional metrics to more accurately calculate risk-adjusted loans and leases. Vehicle type, repair records and usage by geography or road conditions will all gradually be incorporated into credit policies or lease offers to help tailor offers to individual borrowers or lessees.

As the volumes of data acquired from connected cars are aggregated and analyzed, and lenders apply these insights to better understand consumer behaviors and vehicle usage, there will be a greater range and diversity of offers available for consumers. “One-size-fits-all” for various credit tiers or lease models will be replaced with custom-tailored offers that reduce lender risk while improving consumer choice.

The key for lenders to maximize the use of this data will be their ability to analyze these volumes of connected car data in conjunction with the data generated throughout their own loan and lease cycles. Analytics has become an increasingly important tool in loan and lease management, and its importance will increase significantly as connected cars gain market share.

Shaimaa Elk serves as Executive Vice President, Chief Information Officer, and Chief Technology Officer, and is responsible for all elements of product and technology development at defi SOLUTIONS, the technology partner of Auto Finance Excellence, a sister service of Auto Finance News.

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