Business Growth

Hedging a Seven-Year Auto Lending Bet

According to credit bureau Experian, 19 percent of new-vehicle debt and 11 percent of used-vehicle loan terms were 84 months in 3Q 2022. By comparison, Experian data revealed that only 11 percent of new-vehicle borrowers and 4.1 percent of used-vehicle borrowers in 3Q 2018 were on the hook for an 84-month auto loan. That’s seven years of debt on a vehicle that begins to depreciate the minute it’s driven off the lot. Outside of lending terms, how is your credit union hedging its bets in the automotive lending space?

Rising vehicle costs, rising inflationary interest rates and continued concerns about the economy have prompted buyers toward lower monthly payments and longer-term loans. Lenders are also willing to offer pre-approved rates at upwards of 96-months on the strength of interest-derived revenue and low delinquency rates. But, how long can that last?

The state of auto lending is not a one-dimensional picture. Let’s look at some details to get a better view of the rewards – and risks – of long-term auto loans.

Business Growth Economy

Putting Customers First to Increase Revenue

We are nearing the first full month with the new Administration and there has been a lot of activity from the White House. Vaccine distribution is rolling out, COVID-19 cases are trending down across much of the country, and Congress has a stimulus package to address. All of these actions bode well for the retail automotive industry. However, auto lenders have several other factors to consider going forward. The average interest rate on a five-year new car loan declined by 38 basis points, and the average four-year used car rate dropped 45 basis points during 2020 according to Bankrate.

Bankrate also predicts that new and used car interest rates will continue their downward trend.  With shrinking interest rates and reduced volume, what steps can your institution take to bolster its auto loan portfolios, especially when competing on a low interest rate is no longer enough to motivate potential buyers to choose your auto loan?

One option is actively promoting auto loan refinance options. Simply helping consumers save a dollar can increase your auto loan income exponentially in this hyper-competitive lending market.


Making A Safe Bet

At the start of the pandemic, the consumer savings rate skyrocketed to 33.6 percent in April. In fact, a MagnifyMoney report revealed the 160.5 percent month-over-month increase in savings in the first half of the year indicated that consumers used unemployment benefits and economic impact payments to supplement their savings accounts after the pandemic erupted and unemployment soared to record levels.

The second half of the year reflects a different situation.  According to the report, the personal savings rate dropped to 14.1 percent in August., and 31 percent of American households report that they or someone in their family has used all or most of their savings during the coronavirus crisis.

Going into 2021, how can lenders reassure their auto-buying customers that they are making a safe bet? Maximize the perceived value of the vehicle with the right protection products, designed to keep more of those valuable dollars in their pocket.

Good value for the dollar

If you are a credit union, you are probably already competing on rate. While no one expects a lending institution to match the zero-percent interest rates offered by the automotive OEMs, a quick search of interest rates offered in November showed a very nice 1.39 percent on a 36-month new car loan offered through credit unions, as compared to the November average 4.24 percent interest rate from a bank for the same loan terms. While these low interest rates mean money stays in the member’s pocket, we also know that everyone is competing on rate.

A more strategic approach to market differentiation involves ensuring that a member’s vehicle stays on the road and performs the tasks for which it was purchased. A 2020 Bankrate survey found that 61 percent of Americans could not manage a $1,000 emergency expense. Those who could handle the expense said they would rely on savings or a credit card to cover the cost. But if savings accounts are dwindling and the average credit card APR is 17.30 percent, an unexpected car repair instantly becomes much more expensive, potentially hindering a member’s ability to make their auto loan payments.

Rather than continuing to compete on rate, those lenders positioned to succeed in 2021 are utilizing consumer protection products like a vehicle service contract or vehicle return protection to build more value into their auto loan offering, aside from simply a low rate.

Products like these can potentially enable members 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 increase control and recoup more potential losses. Additionally, by pairing the benefits of complimentary consumer protection products with a well-executed rate structure, credit unions set their institutions up for materially reducing the risk of default while at the same time, adding value to the loan for their members.

In these uncertain times, many consumers are understandably nervous about purchasing a vehicle. And as a lender, you might be a bit nervous lending to customers facing some challenges. But making a deal on a vehicle with added protection is a safer bet for all around.

With more than 40 years of experience in developing market-differentiating consumer protection products to weather any economy, EFG Companies knows how to expand your market share while protecting your loan portfolio. Contact us to find out how today.