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.