When you hear the term “Millennials” paired with the term “car,” what comes to mind? Do you automatically think, “Millennials aren’t interested in cars?” For the past few years, it seemed like a new article was published every month stating that the reason Millennials weren’t buying cars was due to personal preference.
Today, economics has proven that assertion false. According to J.D. Power & Associates, Millennials (those born between 1980 and 2004) accounted for 27 percent of new car sales in the U.S. last year. Millennials have already surpassed Generation X to become the second-largest group of new car buyers after Baby Boomers; and each year, the influence of the Baby Boomer generation recedes and Millennial buying power increases.
It turns out, personal preference had very little to do with Millennials approaching the auto industry. Rather, it had all to do with the economy, the job market, and wage growth. Most of the Millennials with buying power today entered the job market during the economic upheaval in the Great Recession. Because of the lack of prospects, some returned to school, while others moved in with parents or got roommates and stuck it out in low-paying or part-time jobs that did not utilize their post-high school training or education.
Throughout 2013 and 2014, we’ve seen new auto loan originations skyrocket. In addition, average loan amounts have increased and the subprime market has steadily expanded. While the industry does not expect the same growth in the next few years, the auto retail market is expected to at least maintain current sales levels. Now, subprime lenders are evaluating how to securely expand their market-share over the next few years without significantly increasing risk or creating a “bubble”.
According to a recent Equifax report, subprime loans currently account for about 32 percent of approved auto originations – the highest level since 2008. However, dealers and lenders still rely on traditional algorithms like the relationship between credit score, debt-to-income ratios, and vehicle value to maintain the stability of their portfolios.
During the recession, auto lenders learned that a sole focus on these criteria did not prevent a rise in delinquencies. For example, according to Equifax, the industry saw a rise in default rates among borrowers with good credit scores, while those with lower scores were making payments to improve their credit.
In this post-recession era, lenders are now trying to expand their algorithms to 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 F&I producers 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. While re-addressing algorithms may allow lenders to more effectively structure deals with F&I producers and allow for a broader base of subprime paper, lenders can further protect their portfolio and increase their perceived value among dealers and consumers with complimentary F&I products.
Complimentary F&I 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 stand in the gap 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 dealers F&I department an opportunity for upsell to greater terms and/or coverages to meet consumer 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 almost 40 years of experience in developing market-differentiating consumer protection products, EFG Companies knows how to expand your market share while protecting your loan portfolio. Contact us to find out how today.
According to the latest data from Experian and Equifax, subprime market share increased 4.15 percent year-over-year, with independent auto financing capturing the majority of the market.
As the subprime market continues to expand, the industry has also seen more independent financing companies backed by private equity firms pop up. Competition is heating up and lenders are continuing to loosen their standards. While the experts at Equifax see this as a sign of “health” in the sector, many lenders see competition as another hurdle they must face in the quest to build loan volume.
So, how can lenders protect themselves from loss of marketshare?
If financial institutions continue to increase their loan cap which inconsequentially increases APR, eventually consumers will be unable to sustain the high loan payments that come with their new vehicle. In addition, not all lenders are willing to extend a $20,000+ loan to subprime consumers and compete on rate. Rather than falling into the trap of over-extending themselves, financial institutions are learning how to compete on the value of their loan.
In terms of being valuable to their dealership partners, this means:
providing accessible lending representatives during dealership hours;
having a quick turn-around on loan decisioning;
providing understandable guidelines on the types of consumers that are eligible for their loans;
implementing a quick and efficient funding process; and,
making the F&I manager’s job easier.
Seems pretty straightforward right? You’d be surprised at how many lenders struggle with consistency in these areas. While ease of access and clear guidelines are important in simplifying the F&I process, smart lenders understand that making their loan valuable to the consumer outside of pure APR can significantly alleviate the pressure on the F&I manager and increase the dealership’s PRU.
Of everyone in a dealership, the F&I manager has the toughest job. Consumers walking into the showroom are already interested in buying a car. Consumers in the service drive are there because they need service. For the most part, consumers in the F&I office never even thought about consumer protection products when contemplating the purchase of a vehicle. They walk through the door with defenses raised and skepticism turned on high.
Now imagine the F&I manager was equipped with a loan that provided the consumer complimentary consumer protection products, like a vehicle service contract. Instead of starting the conversation trying to overcome high consumer skepticism with a sales pitch, they are positioned as an advisor. As the F&I manager discusses the type of loan the consumer qualifies for, they have the easy transition into the F&I selling process as they explain all the benefits that come with the loan. At the conclusion, they can then ask if the consumer would like to extend the benefits to the full term of their loan. As you can imagine, this is a much easier sell.
In addition, the value that consumer protection products bring to the table assure the customer that both the dealership and the lender recognize the worth of their business no matter their financial position. This significantly enhances both the financial institution and dealership’s brand in the eyes of consumers, resulting in increased customer loyalty and referrals. All of this, of course, means increased business and revenue for you and your dealership partners.
With over 37 years of experience in innovating agile consumer protection products that give our partners an edge in the market, EFG is your key to driving business and increasing loan volume. Contact us today to turn the heat up on results.