Americans continue to shop for new cars and are taking the plunge and buying. This is an indication of positive consumer sentiment and continued demand for light vehicles. March sales ended strong with U.S. light vehicle SAAR coming in at 17.1 million units — an increase over market expectations of 16.9 million. This is definitely good news for automakers, auto dealers and auto lenders. Moving vehicles off the lot and getting consumers to purchase are keys to success in this industry.
Where is this growth coming from?
It seems that more consumers are getting access to auto loans. In a recent Subprime Auto Finance News article, auto loans originated to borrowers with a traditional credit bureau score below 620 increased by 7.2% same month over last year. Consumers falling into the subprime credit category are often assessing their auto purchase and loan based on payment and not necessarily on the cost of the vehicle. Does this payment fit into my budget versus what is the total cost of the vehicle?
A lender able to develop loan products that meet the needs of this consumer and assess their creditworthiness is able to capture market-share, build positive relationships with dealers, and if effective in their risk management practices, generate a positive return on the investment and satisfy their regulator.
Lenders are actively seeking information about consumers to support lending programs and enhancing current credit evaluation processes. The inclusion of alternative data can provide a lender with a more robust picture of a borrower. This enables the lender to manage risk through pricing and/or terms. In addition, many lenders are evaluating the entire auto loan process and creating both front end and back end processes that ensure quality underwriting, account management and collection practices are in place to address market and regulatory scrutiny.
One of the challenges auto lenders face is gaining efficiency and being the first offer that a consumer gets. Why? Have you purchased a vehicle in the past year? It is definitely a time-consuming process.
Often it can take hours to get from “yes I want the vehicle” to driving off the lot. The quicker the consumer knows they qualify and will get approved for the purchase, the better the customer experience for the dealer and the lender. The buying process can take several hours from start to finish. There are new market entrants that are trying to take the friction out of the buying process by enabling consumers to negotiate the purchase of their new vehicle directly from a dealership and completely on line (www.carlingo.com).
Stiff competition exists in the auto financing market and will continue as auto sales are expected to exceed expectations this year and into 2016. Understanding the underlying drivers of consumer demand and creating products that meet the needs of consumers by integrating alternative data into the customer acquisition, origination, account management and collections gives lenders the opportunities to reach more consumers by expanding their buy box while at the same time effectively managing risk.
Auto and financial service lending activities have been a backbone of U.S. growth. It appears that lenders are getting more comfortable with the current economic conditions, made adjustments to account for challenges that occurred during the recession, and are poised for continue growth.