From the very first time one person loaned another person their hard-earned money or goods, there has been a level of risk on whether they would ever see their money or property again. As the lender, finding that balance between risk and reward created the concepts of payment plans, requiring borrowers to pay back more than the total amount they originally received, as well as sophisticated algorithms for lenders to use to determine how lenient or restrictive to make their lending policies.
We are currently in a highly contemplative and speculative time when it comes to determining that perfect balance in auto finance. After seven consecutive years of vehicles sales gains, the National Automobile Dealers Association (NADA) is forecasting that vehicle sales will total out at 17.1 million new vehicles in 2017, slightly lower than total sales in 2016. This plateau could extend into 2018, or we could potentially even see the beginnings of a period of decline, or even a period of growth and expansion. It could go either way.
Lending practices differ greatly depending on whether an economy is expanding, plateauing, or declining. Hence, the period of reflection. Of course, a plateau at 17.1 million vehicles means that the consumer appetite for auto finance is still strong.
According to Experian’s latest State of Auto Finance Market Report, the total automotive open loan balance reached another record high in the second quarter of 2017, topping $1.1 billion. Average loan amounts remained high across all credit tiers, as well as across both new and used vehicles.
The average new loan term is now creeping toward 69 months, with terms as long as 72 months for higher risk loans, according to Experian.
However, there is always an elevated risk that comes with higher average loan amounts and longer terms. According to the 2017 Non-Prime Automotive Financing Survey by BenchMark Consulting International, lenders are scaling back their nonprime automotive financing.
The survey, sponsored by the National Automotive Finance Association and the American Financial Services Association, found that subprime originations declined by an average of 14.7% in 2016, and pointed to a further slowing in 2017. According to the survey, the reason behind this credit tightening trend is a decline in profitability. Return on average equity declined to 7.6% in 2016, from 12% in 2015. While there are several possible reasons for this decline in profitability, the survey also found that 30-day delinquencies accounted for 9.1% of the total amount outstanding for 2016, up from 8.3% in 2015.
In preparation for what lies ahead in 2018, lenders are now looking at opportunities outside of their traditional lending algorithms, payment plans, and interest rates to achieve that perfect balance between profitability and risk with strategic F&I products, like vehicle return or a vehicle service contract. Products like these can potentially enable both prime and subprime consumers to stay current on their auto loan payment when unforeseen circumstances occur, such as a vehicle breakdown or involuntary unemployment.
By providing a sense of security from life’s unpredictable nature, you could have better control over your loan portfolio while also differentiating your services for dealers and consumers. Complimentary consumer protection products address pressing consumer needs which, in turn, help dealerships demonstrate their commitment to their customers. Dealers offering complimentary F&I products also have the opportunity to further increase their bottom line through the sale of upgrades, as well as the potential to boost CSI scores and increase retention and referrals.
With more than 40 years of experience in helping dealerships and lenders navigate the sometimes choppy economic waters to maintain and grow profitability, EFG knows how to guide your institution to new levels of prosperity. Contact us to find out how today.