We’re halfway through a very interesting year in the auto-lending space. If you had planned for slightly lower auto loan volume, rising delinquency rates, and an uncertain economic outlook, congratulations! You’ve planned for this situation and hopefully are managing well. Going forward, you’ll need to stay the course. The forecast for the second half of this year and all of 2020 appears to be equally bumpy.
The Economy and Vehicle Prices
On June 19th, the Federal Reserve chose to keep interest rates steady in the near term, but retained an option to cut rates as economic risks mount and inflation remains stuck below their target. Many officials on the Fed’s policymaking committee expect to lower rates before the end of the year amid continuing trade tensions and slowing global economic growth. Essentially, the Fed is preparing for the economy to take a hit and is keeping an interest rate ace up their sleeve.
There are other indicators of a stalling economy. A subdued global economy, increased corporate stock buybacks, and some spikes in lay-offs will keep business bumpy throughout 2019 and into 2020. Significant peaks and valleys in the stock market have caused unrest. The good news is a recession may still be a few years off. In fact, a brief inversion in Treasury notes prompted investors to predict another recession in two to three years.
A major player in the state of the economy are the recent Trump Administration tariffs. According to a report from the Tax Foundation on the impact of the tariffs, the actions imposed to date are expected to:
- Reduce long-run GDP by 0.21% ($52.2 billion)
- Reduce wages by 0.13%
- Eliminate 161,751 full-time equivalent jobs
Of course, we’re all watching to see how the 25% proposed tariffs on automobile imports will affect the industry. The Tax Foundation provides some predictions based on import levels. In 2017, the United States imported nearly $292.5 billion worth of vehicles for consumption, while paying about $3.4 billion in duties on those imports. If import levels remain the same, and the proposed tariff would apply to all goods in the Harmonized Tariff Schedule, the new tariff would amount to a roughly $73.13 billion tax increase.
More recently, the Trump administration has mentioned the possibility of singling out auto imports from Canada for tariffs. In 2017, the U.S. imported $55.6 billion of Chapter 87 goods from Canada. Placing a 25% tariff on Chapter 87 auto imports from Canada would amount to a $13.9 billion tax.
Clearly, the whipsaw status of tariffs can have a major impact on the entire country, not just the automotive industry. So, what can you do to control how the economy will affect your auto loan portfolio?
The standard modus operandi when vehicle prices and interest rates increase is to extend loan terms. According to Experian’s State of the Auto Finance Market Report for Q1, 2019, loan terms have been extended to 96 months! Think about the risk associated with an 8-year auto loan. The consumer would be upside down on their loan for the majority of their loan term. What would happen if another recession hits in two years and the market experiences a significant rise in defaults? The hit to your loan portfolio would be substantial! Of course, to combat this risk, we’ve seen a rise in near prime and subprime interest rates.
But, all of these steps are more reactionary. What if there was a way to proactively set your institution apart, increase auto loan volume, and manage risk?
Consumer protection products, like a vehicle service contract or vehicle return protection, provide consumers with the ability to either stay current on their auto loan payments, or return their vehicles with no damage to their credit, should unforeseen circumstances occur, like job loss. They also provide lenders a way to differentiate their auto loans in the market to increase loan volume, and profitability through upsell options. They are the total package solution, providing a simple solution to both the auto loan and risk challenge auto lenders are facing today.
With more than 40 years helping lenders achieve their profitability goals, EFG Companies structures its products and services to provide value to you and the end-consumer. Our unmatched client engagement model goes well beyond simple product innovation to mitigating liability through superior claims processes, and continuous training and compliance practices. Contact us today to turn economic uncertainty into another avenue for profit.