Brien Joyce
Vice President
EFG Companies
According to a recent study from Bankrate.com, the average new-car price tag is too high for the majority of medium-income U.S. households. Here’s the breakdown:
In May, Kelley Blue Book updated the average new-vehicle transaction price to $33,261.
Using that transaction price, Bankrate applied the traditional 20-4-10 rule to conduct the study – i.e.:
- a down payment of 20 percent
- a four-year loan
- principal, interest and insurance payments accounting for 10 percent of the household’s gross income
From looking at your own portfolios, you probably know that the majority of American consumers don’t put 20 percent down on their vehicle, and they are often financing for upwards of seven years. The fact that consumers don’t use the 20-4-10 rule should give you a good picture of the state of American finances in comparison to vehicle prices.
It should come as no surprise that Bankrate’s study came back showing that only one metro area could afford the average-priced new vehicle – Washington, D.C., where the median income is nearly $100,000.
Despite the fact that, according to Bankrate, most households can’t afford to purchase a new vehicle, new unit sales are still on par with last year’s levels. The most recent LMC Automotive/J.D. Power forecast puts 2017 new vehicle sales volume in the low 17 million-unit range for the year.
According to Experian’s latest State of Auto Finance Market Report, loan terms for new vehicles rose to an average of 68.53 months in Q1 of 2017. And, the average monthly payment rose to $509 for new loans.
Clearly, as long as there is demand, unit sales will continue. But what does this mean for your portfolios? How are you insulating your loans beyond interest rates to protect them from the probability of default and delinquency?
Regardless of credit tier, if consumers are taking on more debt than they can afford using longer loan terms to balance it out, we can potentially expect choppy waters ahead – especially when the market turns.
Consumer protection products offer material protection against the risk of delinquency or default. Consider, for example, the inevitable event when a consumer making that monthly $509 payment has a mechanical breakdown. Considering the fact that they had to extend their loan term out to barely afford this steep auto loan payment, it is likely that they will now struggle to pay both the repair bill and their loan. So, the consumer is forced to make a choice: pay for the repair or make their loan payment. They are most likely going to choose the first option, even if that means their credit might take a hit or their vehicle might be repossessed.
Now, if that same consumer had a vehicle service contract on their loan, they could eliminate or at least significantly reduce the cost of their vehicle repairs, allowing them to repair their vehicle and make their monthly loan payment. In addition, by including consumer protection products like a VSC on your loans, you also offer your dealership partners another way to increase revenue through the sale of additional F&I products and upgrades.
As long as new vehicle prices continue to rise and loan terms continue to lengthen, lenders will need to fortify themselves to ensure that the risk of default does not outweigh the potential income from their auto loan portfolio. By pairing the benefits of consumer protection products with a well-executed rate structure, lenders set their institutions up to materially reduce the risk of default while at the same time, adding value to the loan for both consumers and dealerships.
With more than 40 years of experience in innovating relevant consumer protection products, EFG Companies knows how to develop the right mix of products and services to mitigate risk while making your loan more attractive to dealers and consumers. Whether it’s complimentary coverage or private-labeled consumer protection products, EFG has a proven track record of working with lenders to develop and implement these revenue-generating programs. Contact us today to find out how.