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.
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.
Contributing Author: Steve Roennau Vice President Compliance EFG Companies
A good portion of Experian’s latest State of the Auto Finance Market Report revolved around alleviating industry concerns that the auto market is looking more like it did right before the Great Recession. If you’ve been paying attention to headlines lately, you know that economists are worried about how quickly the subprime market is expanding and are asking if there will be another bubble to pop.
With those concerns in mind, lenders are especially concerned with the upward trend in auto delinquency. According to Experian’s report, finance companies experienced a 2.6% year-over-year increase in 30-day delinquent loans with a total balance of $6 billion.In addition, the top 10 states with the highest delinquency rates account for 32% of the total amount of delinquent loans.
With strong subprime growth and increasing delinquency levels, smart lenders are looking at how to level out their delinquency rates, or at least protect their loan portfolio from this growing risk. While some would argue that the best way to pad the portfolio is by increasing APR, there is another option that benefits the lender, the dealer and the consumer. That option is the use of complimentary consumer protection products.
With consumer protection products, like a vehicle service contract or vehicle return protection, consumers are protected from the high costs associated with a vehicle breakdown, or from the negative financial repercussions of instances like involuntary job loss. This same consumer protection also protects the loan. How? Consumers can continue to make loan payments if they don’t have to reallocate funds to cover costly mechanical repairs or cover living expenses on an unemployed budget.
Dealerships also benefit by setting up the F&I product presentation with a description of the benefits consumers will receive with their loans. This offers F&I managers an excellent springboard into presenting upgrade options or additional products to further protect the consumer. Your loan will essentially turn the conversation from strictly a sales presentation to a rewarding and productive discussion about the benefits of consumer protection products, and the value the dealership is providing.
Don’t feel like your only course of action to combat delinquency levels is to raise rates. Pair your loans with complimentary consumer protection products. They can help protect your loan portfolio, while also protecting your customers and providing your dealership partners with the ability to make additional F&I income.
With almost 40 years of experience in innovating compelling consumer protection products, EFG Companies knows how to strategically place the right product mix with your loan to achieve greater loan volumes. Find out how today!
