Choose: Compete or Manage Risk

Remember when you were shocked that average loan terms had increased to 62 months, then 68 months and so on? While the industry is no longer shocked by loan terms that last more than five years, lenders are now grappling with the reality that their borrowers are up-side-down on their loans for much longer periods of time while still making record-high loan payments.

According to Experian’s latest State of the Auto Finance Market report, the average new vehicle payment increased to $506 in Q4 2016, with an average loan term of 68 months and an average amount financed of $30,621.

Within 68 months, what do you think is the likelihood of a consumer experiencing something that would affect their ability to make their auto loan payment? Maybe their car breaks down or they lose their job. Your algorithms can probably tell you that the likelihood is pretty high. That’s why Experian has seen 60-day delinquencies rise in almost every State of the Auto Finance Market report issued in the past few years.

But, that’s why you have tiered rate structures as a buffer against risk. The problem with relying solely on rate to protect your auto loan portfolio is it makes it more difficult to compete for a given group of consumers. That’s why more lenders are evaluating options outside of rate to help mitigate risk.

One option that is growing in popularity is the use of strategic complimentary consumer protection products, like vehicle return protection or a vehicle service contract, such as complimentary limited powertrain protection. Products like these can potentially enable consumers to stay current on their auto loan payment when unforeseen circumstances occur, such as a vehicle breakdown or involuntary unemployment. This makes it possible for lenders to increase control and recoup more potential losses beyond setting a higher APR.

For example, based on aggregated claims data for 2016, EFG found the average vehicle repair bill to be $937.83, just shy of $1,000. Consider the struggle most Americans face when presented with a $1,000 repair bill, when they are already making a $506 auto loan payment. Could your budget take a $1500 hit? What about your adult children’s budget? The most likely course of action is for a person to choose one payment over the other. Consumer protection products enable customers to make a low deductible payment to get their vehicle back on the road and stay current on their auto loan.

As long as loan terms continue to lengthen and vehicle prices continue to rise, lenders need to fortify themselves against the risk of default and delinquency. By pairing the benefits of complimentary consumer protection products with a well-executed rate structure, lenders set their institutions up for materially reducing the risk of default while at the same time, adding value to the loan for both consumers and dealerships.

Consumer protection products address pressing consumer needs which, in turn, help dealerships demonstrate their commitment to their customers. Dealers offering your loans with complimentary consumer protection products also have the opportunity to further increase their bottom line through the sale of upgrades, as well as the potential to boost CSI scores and increase retention and referrals.

With more than 40 years of experience in developing market-differentiating consumer protection products, EFG Companies knows how to expand your market share while protecting your loan portfolio. Contact us to find out how today.