Managing Rising Consumer Debt

The data says it all. According to Euromonitor and JATO, between 2009 and 2016:

• U.S. consumer spending on vehicles grew by 36 percent
• The outstanding balance of consumer auto loans increased by 36 percent
• Disposable income only grew 15 percent
• The outstanding balance of consumer loans as a whole decreased by 7 percent
• The average auto debt per car in circulation rose by 44 percent

Everyone knows that since 2009, auto manufacturers and lenders aggressively pursued unit sales and loan volume. Manufacturers have hit a peak when it comes to providing deep incentives, while lenders loosened credit standards, increased terms, and dove into the deep-subprime space.

Morgan Stanley recently reported that the percentage of deep subprime loans rose from 5.1 percent in 2010 to 32.5 percent in 2017.

Now dealers, manufacturers, and lenders are beginning to see what the other side of this rapid expansion looks like. Sales are plateauing regardless of dealer or manufacturer incentives. Defaults and delinquencies are up, and loan originations are on the decline.

According to Autonomous Research, the first quarter of 2017 marked the third straight quarter of auto loan originations decline.

Historically, when lenders see these trends in the market, they adjust their underwriting strategies to be more conservative and raise their APR. However, these tactics inevitably cause a more competitive environment in the prime space. Rather than only utilizing the tools that lenders have used for decades, it’s time to think outside of the box when it comes to the balance between managing loss ratios and increasing loan volume.

• What processes are in place to ensure a loan application comes to fruition?
• Are you offering consumer protection products in conjunction with your auto loan prior to the consumer finalizing in the F&I office?
• Does it provide consumers with protection from the effects of a costly mechanical breakdown or even job loss?

Providing tangible value to both dealers and consumers puts you miles ahead of the competition. How do you do this? One of the best ways is with complimentary consumer protection products, such as with a limited powertrain warranty or vehicle return.

Complimentary products such as these set the stage for upsell opportunity, making it possible to increase your margins, as well as the dealership’s PRU. By providing a valuable service to the end-consumer, it’s easier to familiarize them with the benefits of the product and position the upsell as just another way to extend those benefits.

Of course, the savvy consumer will only believe in the products with the best reputation. That’s why it’s important to shop around for the best product administrator. Good administrators, such as EFG Companies, have established themselves in the industry as being customer-centric. When evaluating potential administrators, pay attention to their claims paid, and timeliness of payment. Administrators like EFG know that a good product doesn’t just benefit a lender, or just a dealership, it benefits everyone. And, they make sure everything from product development to administration and claims adjudication follows this principle.

Fortify your business with EFG. Contact us today to learn how our solutions provide the greatest return to you and your dealership partners.