Maintaining a steady, positive cashflow is essential in any business, and it is especially important for automobile lenders who constantly monitor available cash to ensure that they can fund new deals. It is a cycle that must be continuously scrutinized, measured and forecast to ensure that the lender has the liquidity to remain solvent — let alone thrive.
In a soft economy with elevated inflation, even more attention must be paid to cashflow as more payments may be delinquent — and consumers are more likely to default on loans. According to Cox Automotive, auto loan delinquency in December 2022 was nearly 27% higher than the same period in the previous year.
There are lots of reasons for the market’s softening: far higher automobile prices — and subsequently, bigger payments — fueled by supply shortages during the pandemic and, in recent months, a tepid job market and higher interest rates. The U.S. Bureau of Labor Statistics reports that auto prices have climbed an alarming 22% over the last four years, and interest rates are at their highest level in about 15 years.
A cashflow management tool
As a growing number of consumers struggle to keep up to date with their auto loans, savvy lenders are using their loan management system (LMS) as a proactive tool to manage delinquencies and ward off potential defaults. A robust, cloud-based LMS offers a number of capabilities that lenders can use to stay ahead of the curve and proactively identify and circumvent problem accounts.
Why rely on the LMS?
The simple answer is that this is the platform through which lenders make back their money, and then some. While lenders may gravitate to the loan origination system for its ability to process and decision loan applications, the LMS is where the hard work of managing accounts and receivables resides. A modern LMS offers enormous benefits for preserving, and even increasing, cashflow. A good loan servicing system also allows queues to be dynamically changed to help lenders target specific accounts instead of requiring them to stick to fixed definitions for delinquencies.
For example, LMS solutions built on cloud technology can integrate with advanced alternative data providers that help lenders get a clearer picture of the current financial state of customers. If a consumer falls behind in other payments, such as housing, utilities or phone bills, alternative data providers can find this data and notify the lender through the LMS, allowing them to proactively contact the borrower and discuss a remedy to their predicament. Likewise, if the employment status of a customer changes, alternative data sources can quickly inform the lender that a situation has occurred that requires monitoring.
A sophisticated LMS can also help lenders improve collections activity by automating data gathering, analysis and outreach processes. These capabilities empower the lender to maximize efficiency by intelligently initiating outbound contact through the most effective channels. For instance, analytics can identify where, when and how a customer is most reachable. By analyzing vast amounts of call data records and integrating this information into the LMS, along with outbound campaign management solutions, a lender can intelligently predict the best time of day and most likely phone number where the customer can be reached, and then initiate communication — which can be voice, text or email — to get the attention of the consumer. This use of predictive analytics enables lenders to reduce receivables, lower operating costs, and it results in mutually beneficial outcomes for all parties.
A good LMS allows lenders to integrate with third-party payment acceptance services through an API, giving lenders another resource for improving cashflow. In this scenario, an LMS is actually transformed into a cash management machine by giving customers easy options to pay balances. Many of these services support wallet-type payment methodologies like ApplePay and SamsungPay, as well as ACH, debit and credit cards, allowing customers to pay balances through the mechanism they prefer. It is a safe, reliable and an easy way to help close receivables and preserve cash.
In the unfortunate instance of repossession, the loan servicing system can integrate with GPS technology and repossession specialists to expedite recovery of the asset. This can shorten the time needed to repossess the vehicle by giving recovery vendors the exact location they need, all in real time.
In any economy, maintaining consistent cashflow is a prerequisite for sustaining a viable business. When an economy stutters, maximizing cashflow is even more critical. And in lending, proper cash management is absolutely essential.
The latest platforms give lenders unprecedented ability to stay ahead of cashflow issues through integrations with advanced third-party data, analytics and payment services. Through these capabilities, lenders can identify potential problems and ensure that cash pipeline remains consistent and secure.
Bob Metodiev is head of business development at Inovatec Systems Corp., which provides cloud-based loan origination and loan management solutions for automotive, power sports, equipment and other lenders.
The Big Wheels Auto Finance Data 2023 report, the only tabulation of the top 200 auto lenders by outstandings, is available now.