Are You Prepared for Rising Auto Loan Rates?

Last year was a great year for the auto industry mostly because consumers from all credit tiers were able to secure financing for both new and used vehicles. According to the Federal Reserve, auto loan rates for new cars hit their lowest level in the last 40 years. Meanwhile, subprime lenders increased their share of the used vehicle market to nearly 56.7 percent by Q3 of 2013.

However, those low interest rates were paired with longer terms and higher loan-to-value ratios through the first quarter of 2014. Because of this trend, NADA analysts expect subprime lenders to react to the heightened risk of potential default associated with longer terms and begin to raise their rates in the second half of 2014. In other words, the subprime low APR bubble may be bursting.

With a rate increase expected in the latter part of this year, how are you preparing to keep your share of the market?

Lenders always have that drive to compete on rate. But, when you are unsure about the potential for significant rate volatility, how do you manage the impact on your loan volume?

In reality, the F&I manager will often look beyond rate and assess the overall benefit of conducting business and maintaining relationships with particular lending institutions. Here’s a quick self-diagnosis to determine how well insulated your business is to market rate fluctuation:

• How available are our field reps to our dealers’ F&I Managers and how engaged are they in the dealers’ business?
• How quickly and efficiently do we provide call-backs on decisions and fund loans for the dealers?
• Do our loans help or harm the dealers’ ability to sell more vehicles and sell F&I products to increase dealership profit?
• Are we committed to the automotive market long term?
• Do we have a solid reputation in the area of customer service?

Your availability and active engagement with the dealer is critical.  Ensuring that your field reps are adding value to the dealer’s operation at every point of contact will keep your organization in a market position where dealers want to conduct business with you, regardless of rate-competitiveness.  Likewise, your paper buyers must provide timely call-backs and show a willingness to put deals together for the dealer.

Strong relationships between your buyers and the dealer’s F&I Manager combined with the efficiency of your loan approval process can keep you at the top of the dealer’s lender list through the peaks and valleys of rate movement.  The same thing goes for underwriting.  Streamlining the underwriting process and ensuring loans are funded efficiently builds equity in your company’s brand with the dealer.  The more equity you build in your brand with the dealers, the more insulated you become in a market with rate volatility.

In addition, the loan itself, in structure and added-value content, can build value in your lending institution, by encouraging the dealer to consider you as a primary lending source—regardless of market rates. Whenever possible, leaving room for the dealer to sell consumer protection products in F&I helps drive dealer profitability and may help mitigate loss for all parties on the loan.   Or, offering a loan that provides complimentary F&I products could be the differentiator that continues to drive loan volume your way.

In a market where your rates will increase and lending criteria may tighten, good lenders will find a way to add value to the dealer’s business, or find themselves becoming secondary sources in the marketplace.  Dealers want to know that a lender is committed to the market. They want partners that will demonstrate staying power through the ups and downs of the sub-prime market conditions.  A lender committed to the dealer’s business will earn his business.

Lastly, it’s important to maintain your reputation with the end customer. Consumers are savvier today than in the past. They actively research the majority of companies with which they choose to do business, including lending institutions. If your institution is known as having poor customer service, it’s likely that customers will jump ship and refinance with someone else the first chance they get. On the other hand, strong customer service tends to keep customers in the loan and willing to utilize your institution for future financing needs

With over 35 years of working hand-in-hand with dealers across the U.S., EFG Companies understands engagement with the F&I professional, the value of solid consumer protection offerings, and the intricacies of reputation management.

Find out how EFG can move your business beyond the APR race, drive value in the market, and increase revenue streams today.