5 keys to auto finance success in 2021

There’s no doubt that 2020 has been a turbulent year for the auto finance industry. With eight months of the pandemic in the rearview mirror, strong credit performance and record origination volumes in the third quarter are evidence that the industry is performing far better than was initially forecasted in April. Still, financiers at this year’s Auto Finance Summit agreed that the COVID-19 economic crisis has brought lasting change to the market. Here are five key takeaways from the summit that auto lenders should keep in mind into the new year. 1. Peak losses cast a long shadow Credit performance has been surprisingly resilient in the third quarter, largely as a result of robust loan modification programs, government stimulus, unemployment benefits, and Payroll Protection Plan dispersions. In fact, Ally Financial logged its lowest third-quarter loss levels since 2013, Capital One released $79 million in auto loan allowance, and Santander Consumer USA ’s net charge-off rate decreased 750 basis points year over year to 0.6%. Yet unemployment remained elevated at 7.9% in September, according to the U.S. Department of Labor , and the pervading thought among auto finance executives is that peak losses are still looming — especially in the absence of additional government stimulus. “The thought process to when [losses] peak probably depends on next round of stimulus, assuming there is one,” Ally President of Auto Finance Doug Timmerman said during the fireside chat at the summit. “If there's more stimulus, it could push [peak losses] later in the year, but I'm not sure if it's in the first half, or toward the second half,” Timmerman said. “For us, it’s very important that you staff up and make sure your teams are ready, no matter when it comes.” At SCUSA, Chief Executive Mahesh Aditya believes that additional government support will be necessary in order to keep losses in line with pre-pandemic levels. “In order for the economy to compute a soft landing, there needs to be a secondary stimulus, and/or a vaccine,” he said during the company’s third-quarter earnings call. Capital One, which lends to borrowers in the prime and super-prime credit tiers, also expects credit to deteriorate in 2021 without additional stimulus, Chief Financial Officer Terry Dolan said during the bank’s third-quarter earnings call. “Part of [low delinquency rates] certainly is due to the stimulus plans, the unemployment benefits … which is creating a bit of a bridge,” Dolan explained. Earlier in the year, many auto lenders, including GM Financial , forecasted peak charge-offs to land anywhere between 2% - 2.5%. 2. (Almost) free money The Federal Reserve ’s monetary policy has set the target benchmark interest rate — the cost of borrowing funds — to 0% - 0.25% for at least the next three years, which should encourage more subvented loan offerings from OEMs and captives as new models come to market next year. Nissan Motor Acceptance Corp. , for one, will extend 0% financing offers into next year, President and Chief Executive Kevin Cullum said during the summit. “With rates as low as they are and borrowing costs as low as they are, 0% doesn’t really cost much,” Cullum said. “So, offering that as an incentive is actually very affordable; it’s a good use of incentive money that’s available.” Cullum said that the subvented offers will be used to support Nissan Motors’ new lineup of vehicles. According to the OEM’s website, there are several new and reimagined models hitting the market in 2021, including the all-electric Ariya hatchback, the Rogue and the full-sized Titan pickup, which will be making its sophomore debut. Captives found success in extended-term and 0% financing incentives during the height of the pandemic and were able to command 58% of all new-vehicle financing year to date in July, up from 50% in the same prior-year reporting period, according to Mike Buckingham , managing director of PIN auto finance at JD Power . 3. Lenders accelerate digital initiatives Shelter-in-place orders and forced shutdowns at the height of the pandemic have changed the way consumers shop for a vehicle, and the new trends have shown no sign of slowing down. With national coronavirus cases on the rise in early October, many consumers are demanding remote purchasing and financing options — even as showroom floors remain open. While e-sign capabilities have been around for years, lenders such as BBVA Bank , VW Credit and Wells Fargo Auto have prioritized these initiatives in response to the pandemic. In 2021, many lenders will continue to invest more resources in technology, as evidenced by the Pulse of the Market polling session at the Auto Finance Summit, where 43% of attendees indicated their company had increased their technology spending. The pandemic highlighted lenders’ current technology, areas in need of improvement and the existence of a variety of available tools, noted Chris Mitcham , SCUSA senior vice president of service for others, during the session. Fintech partnerships may also proliferate as some lenders have realized they weren’t prepared during the pandemic and should invest more in technology, said Mark Cromer , senior vice president and chief operations officer for Farm Bureau Bank . Auto dealers, too, are requesting more digital capabilities from their lender partners amid shifting consumer demands, according to a survey conducted by CU Direct prior to the summit. In fact, 74% of the 91 dealers surveyed said that they were highly prioritizing online loan and credit applications, and 68% said that loan pre-qualification and pre-approval should be completed digitally. 4. Out of office At the end of March, lenders were forced to shift to a work-from-home environment as the number of new cases spiraled out of control. Captives such as Ford Motor Credit and GM Financial had to pivot their operations practically overnight to set up technology infrastructures to support their employees. Today, lenders such as Westlake Financial and Ally Financial employ a hybrid work-from-home model — namely that many employees still work from home, while some of the leadership team remains on site. Next year, expect many lenders to continue to allow their employees to work from home. Ally Financial, for one, has already set in motion plans to allow much of its collection team to work remotely for the long term. The Detroit-based lender has had its consumer underwriting teams working remotely for a “long period of time,” which has netted positive performance results, said Timmerman. There’s an additional upside to a work-from-home structure, Timmerman said. “With work from home … you’re not limited by geography. You can go out and find the very best talent no matter where they’re at.” 5. Used-vehicle values remain resilient Used-vehicle values are expected to remain strong for the next three years, fueled by economic recovery, pent-up demand and squeezed new- and used-vehicle inventory, analysts agree. And those strong values are helping lenders such as Capital One and Ford Credit readjust their loss expectations, according to third-quarter earnings reports. The lack of supply should help drive prices up in the near term, too, if expected inventory shortages in the second quarter of 2021 come to fruition, said Alex Yurchenko , vice president of data science for Black Book, at the summit. Returning off-lease vehicles could also keep prices high, especially if the SAAR returns to its normal 16-17 million units next year, said Eric Ibara , director of residual values at Kelley Blue Book . And while it remains uncertain what 2021 has in store, the economy is recovering. The unemployment rate is improving, and gross domestic product is back in growth mode, which should help boost used-vehicle prices, said Kristen Lanzavecchia , manager of industry insights for ALG . “We are expecting to see some positivity there,” she said.

5 keys to auto finance success in 2021

Used-vehicle prices remain seasonally strong

COVID drives 10K-mile lease promotions

COVID drives 10K-mile lease promotions

Stay Informed with Our Newsletters

The Roadmap Podcast

SPONSORED

Why credit unions give dealers an edge in today’s auto market

Driving better decision-making across auto finance operations with SAS

Auto finance’s first line of defense: Raising the standard in integrated software partnerships and data strategy

Retrieve your password