Key contributions provided by AFG
It is an exciting time to be a bank or credit union in the auto lending marketplace!
More than ever before, borrowers are seeking out unique solutions for financing their vehicles, and the current market leans favorably toward financial institutions offering alternative approaches to auto lending.
Additionally, there has been an increase in used vehicle purchases and trade-ins over the purchase of brand new vehicles.[1]
Several factors lend themselves to these changes in buyer behaviors, namely:
- The rise of new car prices – More model updates, technological advancements, and cosmetic choices have led to historically high monthly car payment averages.[1]
- Millennial penetration of the marketplace – This generational group typically likes to drive cars with the latest and greatest features.[2] So having the flexibility to trade-in and upgrade their vehicles is often quite important to them.
Along with rising interest rates - which are at a nine year high of 5.75%, according to Edmunds[3] - and increases in negative equity, these shifting market trends are driving the need for alternative lending solutions like residual based financing.
Residual based financing is particularly enticing to borrowers, as it allows for shorter loan terms and lower monthly payment plans. And only 1 in 3 lenders are currently offering this financing option to their consumers.[4]
In other words, lenders that do offer this unique option to their consumers could be winning over missed financing opportunities from the nearly 70% of lenders using only traditional loan methods.
What else can you do now to expand your approach to lending and set yourself apart from the competition?
- Offer a low monthly alternative like residual based financing on both new and used vehicles, since roughly 50% of today’s loan portfolios are comprised of used vehicles.[5]
- Step outside of your comfort zone - Offering financing on used cars is a HUGE opportunity. In fact, Edmunds forecasts used car sales will continue to grow in the next year.[6]
- Consider a variety of payment options and desirable loan characteristics like shorter loan terms and lower monthly payments.
- Expand your scope of lending outside your traditional borrowers. According to Experian, traditional users of residual based finance programs are prime or super prime borrowers.[7] They have good credit and money to spend!
These lending methods can open the door to attracting new consumers and loan opportunities, all the while helping your lending institution remain competitive in the marketplace, increasing loan volume and loan yield for years to come.
Want to learn more ways to reimagine your auto loan portfolio?
Visit our Residual Based Financing webpage.
Download our White Paper: "How to Step Away from Traditional Lending".
[1] Kelly, Tim. “Navigating a shifting auto lending landscape.” Credit Union Journal, 1 June 2018, https://www.cujournal.com/opinion/how-credit-unions-can-navigate-a-shifting-auto-lending-landscape.
[2] Wood, Matthew. “Leasing Boosts Millennial New-Car Sales.” Auto Finance News, 17 July 2018, https://www.autofinancenews.net/leasing-boosts-millennial-new-car-sales/.
[3] “Auto Loan Interest Rates Hit Nine-Year Record High, According to Edmunds.” Edmunds, Inc., 1 June 2018, www.edmunds.com/about/press/auto-loan-interest-rates-hit-nine-year-record-high-according-to-edmunds.html.
[4] “2018 Used Car Market Report & Outlook.” Cox Automotive, 22 March 2018. https://www.coxautoinc.com/learning-center/2018-ucmro/
[5] Canova, Robert. "Looking under the Hood: Current Conditions in Auto Lending." Federal Reserve Bank of Atlanta, 4 May 2017, https://www.frbatlanta.org/economy-matters/banking-and-finance/viewpoint/2017/05/04/looking-under-the-hood-current-conditions-in-auto-lending.
[6] Overby, Joe. “Positive signs continue for used-car retail sales.” Auto Remarketing, 23 May 2018, https://www.autoremarketing.com/ar-categories/sales-forecasts.
[7] Zabritski, Melinda. “It’s a ‘prime’ time to buy a car.” Experian, 19 Dec. 2017, https://www.experian.com/blogs/insights/2017/12/prime-time-buy-car/.