vsc | Lending Curve

As the auto industry continues to lead the nation in recovering from the Great Recession, we’ve seen credit standards loosen significantly throughout 2013 and 2014. While this has enabled more subprime consumers to get into both new and used vehicles, we’ve also seen the rising trend toward longer terms to keep payments lower.

The latest “State of the Automotive Finance Market” report from Experian paints a pretty interesting picture, where the average subprime consumer finances $27,528 for a new vehicle at a 9.39% APR for 71 months. This equates to a monthly payment of $424.

Think about that for a second: 71 months at $424.

According to that same report, the average auto loan term for new vehicles across all credit tiers reached 66 months for the first time. This is the highest average term since the company began publicly reporting data in 2006.

Clearly, more and more consumers are pushing for longer terms to get into the cars they want, and with longer terms come a higher risk of delinquency or default. Traditionally, lending institutions rely on a managed tiered-rate structure as a buffer against that risk. There are, however, other ways to help mitigate this risk.

Consumer protection products offer material protection against the risk of delinquency or default. Consider, for example, the inevitable event when a subprime consumer making that monthly $424 payment has a vehicle breakdown. It is likely that while they can normally make their monthly loan payment, they will now struggle to pay both the repair bill and their loan. So, they are forced to make a choice: pay for the repair or make their loan payment. They are most likely going to choose the first option, even if that means their credit might take a hit or their vehicle might be repossessed.

Now, if that same consumer had a vehicle service contract on their loan, they could eliminate or at least significantly reduce the cost of their vehicle repairs, allowing them to repair their vehicle and make their monthly loan payment. In addition, by including consumer protection products like a VSC on your loans, you also offer your dealership partners another way to increase revenue through the sale of additional F&I products and upgrades.

As long as terms continue to lengthen, lenders need to fortify themselves to ensure that the risk of default does not outweigh the potential income from their subprime portfolio. By pairing the benefits of consumer protection products with a well-executed rate structure, lenders set their institutions up to materially reduce the risk of default while at the same time, adding value to the loan for both consumers and dealerships.

With over 37 years of experience in innovating agile consumer protection products, EFG Companies knows how to develop the right mix of products and services to mitigate risk while making your loan more attractive to dealers and consumers. Whether it’s complimentary coverage or private-labeled consumer protection products, EFG has a proven track record of working with lenders to develop and implement these revenue-generating programs. Contact us today to find out how.

2013 is almost over and 2014 is upon us!

How did you fare in meeting your 2013 business goals?

How about preparing for 2014 initiatives?

Throughout the year we saw competition heat up as larger lenders got back into the subprime market, forcing underwriting standards to loosen across the industry. As larger banks and credit unions began offering more pre-crash terms and pricing on subprime auto loans, smaller institutions that focus on subprime lending have struggled to retain organic growth and keep their customer portfolio filled with well-qualified customers.

To regain market-share and outperform organic growth in 2014, subprime lenders need a two-pronged strategy to compete with increased competition for loans.

Insulation

The first step is to insulate your business from big lender competition. How do you do this? By focusing on your strengths! Those big lenders are still very wary of the subprime market; if there’s the slightest chance of significant volatility, they will jump ship. However, because you’ve weathered the storm through the Great Recession, you know how to manage more volatility in the market.

Part of the reason subprime auto lenders survived was because of their focus on customer service. By fortifying relationships with dealers and customers, and being flexible in tailoring their loans to meet consumer needs, those subprime lenders found a way to flourish in one of the toughest economic downturns in U.S. history. That strong focus on customer service will set you apart as competition increases. Throughout 2014, continue to ask:

How can we increase efficiency and courtesy in responding to applications?
How can we provide more value to both our dealership partners and the end consumer?
How can we increase transparency within our parameters to ensure our dealership partners know which customers qualify for our loans?

Attraction

The second step in the strategy is to make your auto loans more attractive for greater organic growth. This goes hand-in-glove with insulation as you cannot make your loans more attractive without good customer service. Concentrate on providing tangible value to dealerships by helping dealership personnel present more qualified customers by ensuring they understand your standards, and by responding quickly and efficiently to all applications.

Differentiate yourself beyond terms and pricing with consumer protection products, such as a vehicle return program, a vehicle service contract, or a limited powertrain protection plan. Products like these boost your bottom line, your dealership’s margins and protect the pocket-book of the loan applicant.

By focusing on customer service, flexibility and value, it is possible to tailor your portfolio to perform better in 2014. With over 36 years serving as an industry innovator of consumer and vehicle protection programs, EFG Companies is committed to the continuous development of innovative products and services paired with go-to-market strategies and execution support across a multitude of channels.

Find out how we can help increase your loan volume and performance while providing additional upsell opportunities to accelerate revenue growth. Contact EFG today!