Mark Rappaport
President
Simplicity Division
EFG Companies
According to recent data from the S&P Dow Jones Indices and Experian, auto defaults rose by 9 basis points in August, and by 10 basis points in September, 2017. These represent the largest month-over-month increases since December 2011. In addition, September’s auto defaults represent the highest level analysts have seen since February 2015.
With these numbers in hand, it’s no surprise that more banks are pulling out of the subprime auto finance space to retool their credit algorithms. As credit unions and captives scramble to capture that market share, lenders everywhere are evaluating how to securely expand their auto loan portfolios without significantly increasing risk.
We’re seeing more lenders looking into alternative data to expand their algorithms and better qualify consumers. Among other criteria, lenders are increasing the importance of income verification, employment tenure, pay frequency and the possibility of employment disruption in their qualification process.
By taking more information into consideration, lenders can more accurately determine appropriate rates, terms and deal structures. In addition, they can work more effectively with dealers trying to secure a loan for someone who may have demonstrated they can make their loan payments, but with challenged credit.
In the end, this all boils down to beating the competition on reaching the right consumers with a compelling offer. In addition to re-addressing their algorithms, lenders can further protect their portfolio and increase their perceived value among dealers and consumers with complimentary consumer protection products.
Consumer protection products have the potential to reduce risk by addressing the consumer’s ability to make their loan payments when life takes a turn. For example, consider a consumer rebuilding their credit and savings who may be living paycheck to paycheck. For this consumer, a deviation from their monthly budget can challenge their ability to make a car payment. Products such as vehicle service contracts and vehicle return protection can help bridge the issue to help consumers pay their car loans when the unforeseen occurs.
Whether it’s an unexpected mechanical repair or a life event, products like a VSC or vehicle return can help the consumer, the dealer and the lender. Loans offering complementary products for a limited term provide the dealer’s F&I department an opportunity for upsell to greater terms and/or coverages to meet the consumer’s needs.
The more opportunities a lender provides a dealer to structure deals, help consumers and make profit, the more likely that dealer will use that lender. The combination of utilizing more sophisticated algorithms to create smart deals, along with valuable, complementary F&I products with upsell opportunities, provides the dealer with the necessary tools to sell more cars profitably, and the lender the opportunity to grow a more protected volume of loans.
As you re-evaluate your position in the market and your expansion strategy, consider making your loans more secure and more profitable for both you and your dealer partners with the right F&I products.
With more than 40 years of experience in developing market-differentiating consumer protection products, EFG Companies know how to expand your market share while protecting your loan portfolio. Contact us to find out how today.