Risk versus Reward in 2018

While the hastily signed Congressional Tax Reform Bill had many phoning their accountants at the end of 2017, the real questions are quickly emerging in 2018 as tax season looms. A strong stock market close in 2017 has been tempered with a predicted return of inflation, thanks to the Federal Reserve signaling interest rate hikes. How will lenders weigh the risk versus reward for the automotive credit market in 2018?

No doubt there are some bright spots on the horizon for the automotive market. Talk has abounded at this week’s Detroit Auto Show around advanced technology and improved models. Consumers signaled in December that demand is still high for the right type of vehicle – i.e., light trucks and SUVs. However, OEM incentives also reached record highs in 2017. And, while the volume of lease returns spiked, used car inventory continued to tighten in certain parts of the country struck by natural disasters.

Many economists and investment firms are remaining cautious for the beginning of 2018.  Credit Suisse Group AG issued an interesting comment, stating, “After a year of strong investment returns on risk assets, we enter 2018, a year likely to see sustained economic growth and good, albeit more limited returns. We believe the next generation, or Millennials, will emerge even more strongly as a major driving force in key realms of life.”

There, my friends, lies the rub of the 2018 automotive credit market. How will auto finance embrace this new Millennial demographic with its demand for digital, penchant for ride-sharing, and overall sense of frugality thanks to mountains of educational debt? How will auto dealer principals and their F&I departments adapt with the times? What does transparency and customer-centric service look like in 2018?

Weighing Opportunities for 2018

In a projected flat auto sales environment, lenders should brace for increased competition and expect to work harder to capture that business. While lenders are already adept at reaching customers online, auto dealers are in the beginning phases of fully utilizing the digital platforms to their utmost potential.

Dealers are being forced by consumers to not only connect with them online, but also conduct business online. While dealers begin the process of adapting operations to take greater advantage of a more digital environment, auto lenders have the opportunity to determine how to better facilitate an online finance process through the dealership. The lenders who most quickly adapt to this new business paradigm will be better positioned in the market for future success.

In the same vein of enhancing relevancy within the dealership, now is the time to shore up dealer relationships, understand dealership goals, and review profit metrics frequently. This additional knowledge will enable lenders to buy more aggressively where possible. And while cars are becoming more technically advanced, lenders will need to think beyond technology solutions for automatic approvals. Ensuring loan officers are available during dealership hours to better manage contracts in transit will get more loans funded.

While a slightly down sales volume signaled that consumers delayed their next vehicle purchase in 2017, news from the Detroit Auto Show indicated that newly released SUVs would nudge sales up in Q1. For 2018, lenders need to re-evaluate their go-forward strategies for loan volume as well as profit percentage with each deal. The more options you provide dealers on how to increase their profit margin on each deal in a compliant manner, the more likely they are to choose your loans. How can this be done? The answer lies with consumer protection products, like a vehicle service contract or vehicle return protection.

Providing complimentary products such as these sets 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.

In addition, 2018 may be the year we change the way we weigh the risk versus reward for the credit market. Consumer protection products, like a vehicle service contract or vehicle return, 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 recoup more potential losses beyond setting a higher APR.

With more than 40 years of experience in developing market-differentiating consumer protection products and working hand-in-hand with dealers across the U.S., EFG Companies knows how to structure your loans to be more competitive in the F&I office, while also helping to manage risk.