Mapping the Route on Auto Lending

What factors drive success for auto lenders and manufacturers?

September 1, 2015

Automobiles take us to work, to run errands, and on vacations.

At times, getting lost can be an adventure as we drive if we have time to make discoveries and enjoy the scenery. At other times, getting lost is inconvenient.

This week, an examination of the auto lending environment. Don’t get lost along the way as you consider the auto lending scenery: Current events in delinquencies, subprime lending, innovations in financial services, and challenges and projections in the auto manufacturing industry.

These sign posts are all important parts of the trip as you map successful strategies in making auto loans.

‘The map is not the territory.’  -Alfred Korzybski, American scientist and philosopher

First, a look at the manufacturing industry, and the perception of consumer needs and preferences.

“The industry is currently navigating a quicker product cadence that spans a significantly shorter timeframe between changeover and vehicle redesigns,” according to analytics company IHS. North America experienced “five years of unprecedented light vehicle production growth” with volume doubling to in excess of 17 million units.

The manufacturing industry anticipates slowing growth rates through the end of the decade due to technological advancements, tighter legislation, and tighter product cycles. Plus, “increased launch activity” will create a challenging, yet opportunistic environment in the years ahead” for both manufacturers and suppliers.

Another thought: “Keeping vehicle costs under control within a tightening legislative environment will be this decade’s most important industry challenge” in the face of emission, safety, and other requirements.

Still, the industry expects more than 88 million vehicles will be built around the world in 2015, up 1% over last year.

A priority for dealers, according to PwC, is to create a seamless buying experience for consumers. Buyers want convenience in purchase choices, financing, and insurance. Both sellers and buyers “are motivated to speed up the transaction.”

“Accommodating these shifting attitudes about buying a car will require equal changes to dealers’ processes, including investment in new technology.”

It is suggested that dealers invest in customer care technologies to make the process more pleasing, and “foster a continuous connection with customers through vehicle lifecycle software and apps.”

‘Somewhere there is a map of how it can be done.’  -Ben Stein, actor

Is there opportunity for financial institutions to get closer to the consumer in the auto purchase process?

In attempt to increase auto loans, Wells Fargo “is building more branches devoted to car loans and financing for auto dealers,” according to Reuters.

As credit card lending remains flat, auto lending presents greater potential for growth. Noting the trend, Wells Fargo has created 56 branches dedicated to car and dealer financing—serving dealers exclusively—and plans to expand operations.

Credit officers at the branches know customers better and the branches “are not just sales offices.”

“It’s a differentiator for us,” observes Dawn Martin Harp, head of dealer services at Wells Fargo. 

Further, carefully choosing risk sector for the bank has proven important as regulators closely monitor auto lending for signs of weakening credit quality.

Still, opportunity exists in subprime auto lending and consumer demand exists, according to SubPrime Auto Finance NewsSubprime has a bullish outlook and “industry observers [are] upbeat about performance and growth.” 

Dealers want to appeal to subprime or near-prime consumers. They are “absolutely interested in trying to approach as many different funding sources as they possibly can. There’s not been a shyness… to deliver the subprime loan. There’s still a need for it.”

Consumers have better employment prospects, and now that they are “back on their feet,” and qualify for financing, more consumers have decided to get vehicles.

Do new opportunities exist to collaborate with dealers given changing consumer circumstances? What new services might drive lending while meeting acceptable levels of credit risk?

‘There’s just something hypnotic about maps.’  -Ken Jennings, author

In another SubPrime Auto Finance News article,  Melinda Zabritski of Experian notes loan terms are on the rise for both new and used vehicles.

The average term for new and used loan originations has reached “new all-time highs of 67 and 62 months, respectively.”

Loans of 73 to 84 months in length equal 29.5% of all vehicles financed, up 18.6% over first quarter in 2014. This is the highest percentage on record since Experian began publicly tracking this data in 2006.

“While longer-term loans are growing, they do not necessarily represent an ominous sign for the market,” notes Zabritski. “Most longer-term loans help consumers keep monthly payments manageable, while allowing them to purchase the vehicles they need.”

But consumers need to know that longer-term loans will require them to keep their cars an additional amount of time or confront negative equity for trade-in early on.

Meanwhile, “those with subprime or deep subprime credit scores borrowed just over 20% of the money loaned in the second quarter,” says in reporting on Experian findings. Individuals with super-prime credit ratings held a little over 20% of open auto loans in the second quarter.

Little change was found in the loans going unpaid. Thirty-day delinquencies dipped to under 2.32% of all open loans, and 60-day delinquencies represented 0.6% of all loans in the second quarter.

The average transaction price for vehicles purchased at dealers in July was $31,691. Second-quarter auto loans were up $92 billion over the same time last year.

There are many considerations in planning a route in auto lending: Consumer preferences, manufacturer and dealer ambitions, and regulatory impact in both the making of vehicles and loans. A rising interest rate environment would contribute additional thought to the lending journey for financial institutions and borrowers alike.

The final destination is hopefully an affordable transaction and acceptable level of credit risk, variables that may differ for consumers.

In any case, forethought is essential. Author H. Stanley Judd once said, “A good plan is like a roadmap. It shows the final destination, and usually the best way to get there.”

 LORA BRAY is an information research analyst for CUNA’s economics and statistics department. Follow her on Twitter via @Bray_Lora and visit the CUNA blogThe Research Roundup: Economic Perspectives.