Experian’s latest State of Auto Finance Market Report made headlines recently, painting a rosy picture for the used-vehicle market. Overall, pre-owned vehicles accounted for 55.61% of all financing in Q2 of 2016. Consumers across all credit tiers are flocking to pre-owned vehicles, with super-prime and prime consumers accounting for 44.95% of all pre-owned loans, representing a 2.6% year-over-year increase.
While Experian highlighted the fact that more prime consumers had entered the market, to the discerning eye, the pre-owned vehicle market is still a subprime game. In fact, nonprime, subprime and deep subprime consumers accounted for 55.05% of all used loans in Q2 of 2016. And, just as consumers don’t quite know the true quality of the vehicle, or vehicle health, lenders are in the dark as far as vehicle reliability.
This unknown could lead to more vehicle repairs, a higher likelihood of breakdown, and even an increased risk of total loss. Add that to the fact that more than half of the pre-owned market is made up of risky credit tiers, and it’s pretty clear why auto lenders as a whole look to protect themselves with higher APRs for the pre-owned space.
Even Experian’s latest report reflects this trend with an average new APR of 4.82% and an average pre-owned APR of 8.97%. However, with more prime and super-prime consumers entering the space, lenders will be hard-pressed to reduce their rates to be more in line with what those consumers are accustomed to in the new-vehicle space. So, how can lenders address this pressure to reduce their average APR for pre-owned vehicles while also protecting their loan portfolios as a whole?
The answer lies in thinking outside of the traditional lending box.
Market-savvy lenders are now contemplating the benefits of offering complimentary consumer protection products on their loans to make their loan offering more competitive with both dealers and consumers, while at the same time protecting their loan portfolio.
Complimentary consumer protection products, such as a vehicle service contract or vehicle return protection, better enable dealers to increase their profit per unit with product upgrades. Offering products as part of the loan gives lenders the ultimate control for compliance measures, while increasing the consumer’s perception of the greater value offered by the loan.
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