Lenders can avoid about 40% of the credit cost by refinancing a loan instead of originating it at the initial purchase, Brad Berning, senior research analyst at Craig-Hallum Capital Group LLC, told Auto Finance News.
“That’s the little secret here that people don’t fully appreciate,” Berning said. “You have a pretty steep early stage delinquency curve on auto loans, so you’re going to have a fair number of people that find out pretty quickly they can’t afford the car that they bought.”
To the extent lenders can place these consumers in a better-suited loan structure, delinquency rates would fall, he said. If rates came down about 40%, for example, that’s a fairly substantial savings that the company can re-invest into its origination channels, and in turn, be able to afford lower cost loans for the consumers, he added.
While that argument “makes sense, it’s not really the whole story,” SpringboardAuto Co-Founder Stuart Holmes told AFN. “There’s just a lot of different reasons for why that customer is [defaulting], but it’s usually loss of job, divorce, or some life event that causes economic hardship.”
Still, Berning argues there’s less risk, now that the lender is aware of the borrower’s hardship.
