Lending Curve

The Federal Reserve recently signaled a pause in raising interest rates, citing concerns about a slowing global economy and sluggish consumer spending. However, these two economic factors have been countered by strength in labor numbers and strong consumer spending in the first quarter. When asked, economic prognosticators and financial pundits say the economy reflects the lens through which it is viewed.

From a lender’s perspective in the automotive space, there are some unique mitigating factors. New vehicle prices continue to rise, pricing some consumers out of the market. Even with relatively low interest rates available for prime buyers, loan terms extended to upwards of 84 months leave consumers uncharacteristically exposed.

For those consumers who pivot away from a new vehicle toward a low mileage used vehicle, the picture is not much better. Low inventory and steadily rising used car prices put prime buyers in competition with traditional sub-prime buyers. Even used car auctions have seen a rise in general consumers willing to take a risk on untested vehicles.

These micro-economic issues do not reflect the macro-economic concerns of tariffs, lengthening loan terms and default exposure.  A record 7 million Americans are 90 days or more behind on their auto loan payments, as reported by the Federal Reserve Bank of New York in February. This number is higher than during the wake of the financial crisis. Some economists warn that this is a red flag.

Given these factors, what levers are available for an auto lender trying to increase an auto loan portfolio?

The much-maligned Millennial demographic often gets dinged for their different approach to financial matters. With the advent of online payment methods, many in this generation rarely set foot in a bank or credit union. They don’t write checks; they demand direct deposit; and they transfer funds among friends electronically. So when it comes to financing a vehicle this group is often lacking connections to lenders. Unlike their parents, or grandparents, they don’t have a “banker.”

Recent research fielded by EFG Companies queried more than 500 Millennials across the U.S. about their banking habits and preferences. 68 percent utilize a traditional bank, nearly 26 percent use a credit union, and 6 percent do not use a bank at all. When asked about where they would go to get money for a vehicle, more than 30 percent said they would start with the dealership, and 12 percent said they had no idea. More striking, more than 60 percent had no idea of the benefits of financing through a credit union. This knowledge gap only complicates an otherwise sketchy financial situation for many Millennials.

According to a PwC survey, only 24 percent of Millennials surveyed could demonstrate basic financial literacy. Of those who have begun saving for retirement, a third said they were “not sure” how their money was invested.  As a group, their financial situations are not strong, having launched their lives later, strapped with student loan or other debt, with lower or missing FICO scores, and a history of postponing large financial purchases. In fact, according to the Project on Student Debt, 68 percent of 2015 bachelor’s degree recipients graduated with an average student loan debt of $30,100 per borrower.