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Mark Rappaport President Simplicity Division EFG Companies

Contributing Author:
Mark Rappaport
Simplicity Division
EFG Companies

There have been several pieces of news this month which could prompt a little champagne and celebration. After struggling through a challenging first half of the year, the third quarter looks to be strong for anyone operating in the retail automotive space. U.S. light-vehicle sales rose 10% in August, the second straight month of higher volume, with positive sales across most brands.

Additionally, on September 19th, the Federal Reserve shaved 50 basis points off the short-term benchmark interest rate, including a quarter point reduction in the general interest rate. But, don’t pop the Champagne cork yet. While this signals good news for auto loan volume, Cox Automotive cautioned the industry not to be too excited, indicating that consumers with lower credit scores will not see any relief. Subprime has reached a 10-year high and the analyst firm sees lenders requiring a higher premium to cover their risk.

Potentially in response to this concern, the New York Federal Reserve reflected that lenders relaxed access to loans for customers whose credit scores were subprime and in the lowest category of prime during the second quarter of this year.

As a result, auto loan and lease originations combined totaled $155.6 billion for the quarter, up 2.9% year-over-year. Keeping a cautious eye on the market, the New York Fed analysts are monitoring an increase in auto delinquencies. In the second quarter of 2019, loans that were 90+ days delinquent rose year-over-year by 4.2%.

The trend tracking site Edmunds commented that while interest rates have declined this year, they remain high year-over-year for several credit classes. Edmunds’ industry analysts credit OEM incentives for the positive sales growth, rather than an improving credit situation.

Taking a pulse on the market is always prudent, but data sets can be interpreted in a variety of ways. Now’s a great time to consult with both your own team and your dealer partners. What type of conversations are your dealers having with customers? Are there trends in the questions being asked? Are there any commonalities that would reveal the “state of the market” in your area?

If you are operating in the non-prime/subprime sphere, what are you doing to insulate your auto loan portfolio from risk? Strategic lenders are looking at how to use consumer protection products to ride the wave of unit sales and protect their loan portfolios.

For example, let’s look at the benefits of vehicle return protection before looking at the broader picture. Imagine if you will, closing a loan with 6 months complimentary vehicle return on a car with the MSRP at $20,000:

  • The consumer did not put a down payment on the car, so they are driving off the lot with a $20,000 loan.
  • The consumer makes four monthly payments of $500 and subsequently loses their income via one of the covered circumstances. At this point, the loan balance is $18,000.
  • The customer returns the car to the dealership, which buys the car back at its current market value, $13,500.
  • Then vehicle return benefit kicks in, paying you, the lender, the remaining balance on the loan, $4,500. The loan never defaults, the consumer’s credit remains intact, and you reduce any potential recovery expenses.

What if the loan did not have vehicle return? You know the recovery and liquidation costs.

This scenario does not even include upgrade options such as payment relief, which further secures the loan.

Fortify your loans and protect your margins by strategically choosing consumer protection products to pair with your auto loans. Strong finance products not only generate more loan applications, but also may help protect you by reducing risk.

All in all, the quarter looks like it will end on a positive note. While we’re not ready to pop the cork yet, I see nothing wrong with keeping that bottle of champagne on ice.

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