Tag: subprime loans

Categories
Business Growth Economy

Are You Ready for Smarter Loans?

Steve Roennau Vice President Compliance EFG Companies
Contributing Author:
Steve Roennau
Vice President
Compliance
EFG Companies

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.

Categories
F&I

Funding Riskier Loans? Reduce the Risk with Your F&I Products

Contributing Author: Brien JoyceSubprime auto lending started booming again in late 2009, early 2010. And 2013 has been no different. According to Standard and Poor’s, the average loan-to-value ratio on vehicle sales to consumers with spotty credit has risen to 114.5 percent this year, from about 112 percent in 2010. As evidenced, you’ve probably seen a sharp increase in competition this year. Well, it’s only going to get more competitive, pressuring your margins and risk.

How do you plan to reduce the risk of these loans without affecting the discipline of your underwriting practices?

Have you ever considered that the finance products tied into your loans could also reduce risk?

With programs like vehicle return from EFG Companies, it is now possible to not only make your loans more attractive to dealerships and car buyers, but may also reduce loss on defaults or delinquencies.

Vehicle return programs maintain a proactive risk-management strategy that may decrease repossessions and collections costs while enhancing loan volumes and increasing finance control.

For example, the basic level of a vehicle return program offered by EFG covers a consumer’s negative equity up to $7,500 as long as the consumer meets the criteria for the claim and returns their vehicle to the dealership. Covered circumstances include loss of income due to involuntary unemployment, physical disability, loss of driver’s license, international employment transfer, self-employed personal bankruptcy and accidental death.

How does this help you?

Let’s look at the benefits of a single vehicle service contract before looking at the broader picture. Imagine if you will, an F&I manager closing a loan with 6 months complimentary vehicle return on a car with the MSRP at $20,000:

  • The consumer did not put a down payment on the car, so they are driving off the lot with a $20,000 loan.
  • The consumer makes four monthly payments of $500 and subsequently loses their income via one of the covered circumstances. At this point, the loan balance is 18,000.
  • The customer returns the car to the dealership, which buys the car back at its current market value, $13,500.
  • Then vehicle return benefit kicks in, paying the lender the remaining balance on the loan, $4,500. The loan never defaults, the consumer’s credit remains intact, and the lender reduces any potential recovery expense.

What if the loan did not have vehicle return? You know the recovery and liquidation costs.

This scenario does not even include upgrade options such as payment relief, which further secures the loan.

Fortify your loans and protect your margins by strategically choosing F&I products to pair with your loans. Strong finance products not only generate more loan applications and approval, but also may help protect you by reducing risk.

Find out more on how you can potentially reduce the impact of loss while increasing profits at the same time. Contact EFG today!

Categories
Economy

It Doesn’t Matter Whether the Economy is Up or Down

Contributing Author: Steve KleesWith the government shutdown and impending national default, companies and consumers alike are avidly watching for updates on the status of the economy. Will it plunge? No one knows and everyone is talking about it.

But look at it this way, there have always been ups and downs and there always will be. Rather than letting the rollercoaster take you for a ride, concentrate on what you can do to consistently increase loan volume.

Whether the market is on an incline or going through a loop-de-loop, your auto loan is compared with three to five competitors. What do you have to offer to ensure an application pulls through into a loan?

Competing on rate alone puts pressure on your margin and sets a benchmark for a competitor to come in and meet it or beat it. The key to consistently pull through loans is to concentrate on your efficiencies:

Superior Service

  • How quickly does your institution respond to an application?
  • Are your loan officers courteous and respectful when speaking with dealership personnel?
  • Do you instill the value of providing superior service across your institution?

The Value Proposition

  • Does your loan make it easier for the F&I manager to upsell consumer protection products to boost their margin?
  • Does it provide consumers with value beyond interest rate that insulates them from significant impacts to their savings?

You’d be surprised how simply providing quality service establishes lasting relationships with both dealerships and consumers. By focusing on customer service, rather than just numbers and rates, you are more likely to close more loans and increase the number of dealerships presenting your loan.

But beyond customer service, providing tangible value to both your audiences puts you miles ahead of the competition. How do you do this? One of the best ways is with complimentary consumer protection products, such as a limited powertrain warranty or vehicle return.

Complimentary products such as these set 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.

Of course, the savvy consumer will only believe in the products with the best reputation. That’s why it’s important to shop around for the best product administrator. Good administrators, such as EFG Companies, have established themselves in the industry as being customer-centric. When evaluating potential administrators, pay attention to their claims paid, and timeliness of payment. Administrators like EFG know that a good product doesn’t just benefit a lender, or just a dealership, it benefits everyone. And, they make sure everything from product development to administration and claims adjudication follows this principal.

So, how do you fortify your business to stay on track in a volatile economy? Focus on efficiencies within both your application processes and supplement your loan with consumer protection products backed by that same focus on efficiency.

Get off the roller coaster and chart your own course with EFG.

Contact us today!