In 2016, we all held our breath to see how the presidential race would turn out, with everyone saying that those results would affect the economy. In the aftermath of President Trump’s win, we watched the “North Star” of the health of an economy – the stock markets – and they rose, hopefully signifying good times ahead.
Nevertheless, the heated political atmosphere continued past 2016 and into 2017. Now, you can’t listen to the radio, turn on the T.V., read a newspaper, or open a social media app without seeing articles about the current administration and whether or not it is successful. No matter if you are a Republican or Democrat, Trump or Clinton supporter, if you’re a lender seeing these stories proliferate, it probably gives you pause on whether the economy can weather this storm.
According to the National Automobile Dealers Association (NADA), U.S. new vehicle sales are expected to stay above 17 million in 2017, roughly on par with last year’s levels. On all accounts, it currently looks like we’re still on track to meet those expectations. As a lender, you probably expect to receive roughly the same loan volume as you did last year. However, economic factors like the heated political atmosphere could have lasting repercussions on your loan volume.
Let’s start with rising vehicle prices. Every year, vehicle prices rise as the cost of making a car rises. Under the current administration, it looks like manufacturing costs will increase more than in years past due to the potential disruption of trade agreements between the U.S. and Mexico, among other countries. Depending on how much new vehicle prices rise, this could affect the general consumer sentiment around buying a vehicle this year, thereby reducing the number of vehicle shoppers.
At the end of 2016, the Federal Reserve anticipated to increase interest rates three times in 2017. While they haven’t instituted an increase yet, the Fed Chair, Janet Yellen, recently told Reuters that she expected the first interest rate hike of the year to take place at their next upcoming meeting.
With the combination of rising vehicle prices and interest rates, you, along with your peers, are most likely taking a hard look at subprime auto loans. I would expect more lenders to continue reducing originations in that space, thereby shrinking the available pool of loans and creating a race for loan volume in the prime spaces.
This will mean that lenders will need to step up their game with dealers to protect their dealer relationships and maximize their loan volume. And, don’t think lenders are the only ones preparing for an unpredictable economy. Dealers will be looking to gain greater profitability from their F&I operations as part of their own preparations. As part of this effort, expect dealers to re-evaluate their lender roster to make sure they are partnering with a broad spectrum of lenders that specialize in the different credit tiers of their customer bases. In addition, dealers may take a hard look at their lender relationships in terms of what they get, and how lenders help them achieve their goals.
What does this mean for you? Take a look at how your institution services dealerships. Think beyond the basics of funding more than the cost of a vehicle to accommodate finance and insurance (F&I) products. Instead, think in terms of all the contact points your institution has with dealers beyond automatic approvals and denials.
Does your team pack up for the day at 5 p.m., letting the automatic system approve or deny loan applications that arrive after bankers’ hours? Or, do you have staff scheduled to help dealerships close deals during dealership hours?
How often do you sift through denials to determine if they could have been approved with more information?
When a loan application is flagged as incomplete, is it automatically denied, or does someone get on the phone with the dealership to keep the contract moving?
How often do your loan managers set up in-dealership meetings to collaborate on the management of look-to-book, contracts-in-transit, and discuss changes to credit qualifications?
Lastly, how are you helping dealers maximize their profit opportunity on every closed loan? The more options you provide dealers to increase their profit margin in a compliant manner, the more likely they are to choose your loans. This can be accomplished by providing complimentary consumer protection products, like vehicle service contracts or vehicle return protection, on your loans.
Providing complimentary products helps set the stage for F&I managers to upsell customers to enhanced or expanded coverage, making it possible to increase your margins in addition to the dealership’s PRU.
In 2017, the name of the game for loan volume will be taking a holistic approach to dealer relationships. Those lenders that make dealer goals a priority will be well placed to increase market share. With more than 40 years of experience helping dealers achieve their profitability goals, EFG knows how to position lenders for success in the retail automotive space.