It’s tax season and that typically means big business for those operating in the retail automotive space. Dealers and lenders alike benefit when consumers flock to dealerships in March and April with tax refunds in hand.
However, this year the IRS is reporting about an eight percent decrease in the average tax refund. Having already processed more than 13 million tax returns, the average refund is landing around $1,865.
What can that buy when it comes to vehicles? If we go by the standard of putting 20 percent down on a new vehicle and at least 10 percent on a used vehicle, $1,865 doesn’t go very far.
According to Forbes and USA Today, the average new car costs $36,000, and used cars are retailing at $19,657 on average. That means this year’s tax refund isn’t even close to covering the down payment for a new vehicle, and consumers will still need to come up with about $1,000 to meet the 10 percent minimum for a used car down payment.
What does this mean for auto lenders? Most likely, fewer consumers will be shopping for vehicles this spring, and those that are in the market will likely be shopping for used vehicles. As the pool of consumers shrinks, lender competition should increase.
Every lender is expected to re-evaluate APR and loan terms when competition increases, as you should. But if everyone’s doing it, does that really set you apart from the competition? And, can you afford to lower your APR and extend your loan terms out at the same rate as the lender next door? Can your portfolio bear the risk of beating your competition?
Regardless of if you can beat the competition on rate today, the question you should be tackling is, what can you do that the competition either can’t or hasn’t thought of yet? To answer this, think about what we know about the coming months.
Assess the Situation
While those consumers not dependent on tax refunds will likely purchase new, the used-car market should be strong. Most used vehicles that you finance are either nearing the end of the manufacturer warranty or are just outside of the warranty. If a breakdown occurs and the customer must foot the bill, they will most likely be forced to choose between making their auto loan payment or repairing the vehicle.
According to the 2017 Federal Reserve Board of Governors Report of the Economic Well-Being of US Households, four in ten adults would either borrow, sell something or not be able to pay if faced with a $400 emergency expense. This metric has improved slightly since 2013, but it is still very disheartening. Eleven percent of respondents said that incurring a $400 emergency expense would cause them to default on at least some of their regular monthly bills.
Now, consider that the cost of an average car repair is between $500 and $600. This can significantly increase for repairs on a vehicle’s engine or transmission to upwards of $1,000. If a consumer can’t even afford a $400 emergency expense, they could be in significant financial straits if a $1,000 expense unexpectedly hit their budget.
What if you could reduce the risk that goes along with funding used vehicle sales and differentiate your auto loan at the same time to increase auto loan volume? This is possible with consumer protection products, like a vehicle service contract or vehicle return protection. Products like these demonstrate a superior commitment to your customers by providing expanded benefits and protection on their second largest investment. These value-added products also help maintain a proactive risk management strategy that may decrease repossessions and collection costs while enhancing loan volumes and increasing finance control.
In a highly competitive market, APR cannot be your only differentiator. Valuable consumer protection products can differentiate your auto loan while also providing a buffer from unforeseen expenses that can cause your customers financial stress, like a vehicle repair or job loss. Providing these benefits can also build better, more loyal auto loan volume.
With more than 40 years serving as an industry innovator of consumer protection programs, EFG Companies is committed to the continuous development of innovative products and services paired with go-to-market strategies and execution support across a multitude of channels.
Find out how we can help increase your loan volume and performance while providing additional upsell opportunities to accelerate revenue growth. Contact EFG today!