Inflation and rising costs are impacting every sector. Vehicle purchases, in particular, plus insurance premiums and repairs, continue to become more expensive. The good news: People are still buying cars. The not-so-great news: cars are claiming greater shares of consumers’ budgets.
Inflation, high interest rates, unemployment, fintech competition, and rising delinquencies. There are so many factors compressing budget margins. Increasing loan terms are the evidence that backs this story.
Loan terms are trending longer
Experian’s recent State of Auto Finance Report reveals that the average loan term is now 69 months. After a brief slump, vehicle values are climbing again, resulting in loan terms trending longer.
Typically, a buyer chooses the length of their loan based on a monthly payment. Rather than choosing a different vehicle with a lower price point, a buyer will opt for a longer term to make the payment more manageable. The fact that loan terms are trending so long indicate that monthly payments are straining borrowers’ budgets.
These five-plus year loan terms are set against the backdrop of historically inflated vehicle values, high interest rates, and rising insurance premiums – in other words…
Hello liquidity crisis.
In an uncertain interest rate environment, buyers have more borrowing hesitancy. Likewise, lenders exhibit the same hesitancy to counteract the ongoing liquidity crisis.
Most borrowers don’t plan to keep their loan or their vehicle the full length of the term, and many, particularly those in mid-credit tiers, are buying vehicles with the intent to refinance when rates come down. In a high interest rate environment, APR savings may be marginal, but it’s not necessary to write-off a refi program until rates come down.
Offering borrowers a competitive refinance option can offer some financial breathing room for their personal liquidity crises, as well as the larger liquidity crisis.
Four ways a refinance program can revitalize auto loan business:
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Add seasoned, high yield auto loans to your portfolio
If your portfolio is feeling disproportionate lately, you aren’t alone. Many financial institutions are finding their loan portfolios- specifically auto portfolios- are composed mainly of low-performing loans pegged at relatively low rates. The prospect of acquiring subprime loans isn’t attractive considering the risk and cost of funds.
On the other hand, with seasoned auto loans (six or more months) there’s built-in payment history demonstrating borrower creditworthiness beyond what a credit score can show. An auto refinance program gives your institution access to vetted and seasoned auto loans and a conversion opportunity to combat a slow loan pipeline while organic loan volume remains down.
These loans aren’t volume for the sake of volume. They come with lower risk and high yield. Refi loans typically have proven performance and are an untapped market for portfolio management. Similar to your direct loan program, you set the underwriting and funding parameters for refi loans that best balance the portfolio and drive new business.
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Attract high-quality borrowers and convert them into accountholders.
A refi program can help your institution to target and acquire new borrowers in new-to-you geographic areas. It’s a way to drive organic business in a specific area before incurring the hard costs of establishing a physical presence.
With a robust refi program, your institution stays in the driver’s seat, leveraging approved borrowers to expand deposits and membership without the added marketing dollars.
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Give borrowers $100 (or more) back a month.
Many borrowers sign on the dotted line based on the monthly payment of the vehicle’s loan. Lowering that monthly payment or helping borrowers pay off their vehicles faster may make all the difference in their budgets.
Typically 6-18 months into an existing loan, a refi offer can put the borrower in a better position and lower their payment by about $100/month. Considering that the average American struggles to cover a $400 emergency expense and the rising unsecured personal debt trends, refinancing can offer true relief in your borrowers’ personal finances.
Seeing the value of refinancing in an elevated rate environment may require some borrower education. Help your borrowers understand that refinancing makes sense (and cents) even when rates are higher. Often, a lower rate is an option with improved credit standing.
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Save on marketing and staffing expenses while increasing lending bandwidth
Preferred LOS (loan origination system) integrations can streamline the entire refi process, from approval to closing. Manual refi processes don’t make sense anymore, especially in light of the refi technology available. Turnkey, end-to-end digital solutions attract loan volume without the need to add any additional in-house staff or marketing investment. Saving on administrative and titling costs can provide more lending bandwidth and, in turn, more revenue.
Don’t be caught off guard by not having an auto refinance program. Here’s how it works:
Allied Solutions and The Savings Group recognize that in this market, any competitive advantage matters. That’s why we aggregate approved auto loans that are the right fit for your financial institution’s lending policy.
We handle the consumer messaging on your behalf, marketing the program at scale. Borrowers can apply online and upload required documentation, or complete the signing with your loan officer over the phone. Our partnership offers a consultative approach to set a budget for refinance loan funding within the parameters that are the right fit for your portfolio and risk appetite. We bring the leads, you bring the funding.
Consider this: How do you picture your portfolio in 6 months? As the market continues to adjust, don’t be caught flat-footed. Invest in a technology and partnership that will elevate your auto portfolio for the future.
Further Reading
The Savings Group is a Leader level partner with Allied Solutions.
About Allied Solutions
Allied Solutions is one of the largest providers of insurance, lending, risk management, and data-driven solutions to financial institutions in the US. Allied Solutions uses technology-based solutions customized to meet the needs of 4,000 banks and credit unions, along with a portfolio of innovative products and services from a wide variety of providers. Allied Solutions is headquartered in Carmel, Indiana and maintains several offices strategically located across the country. Allied Solutions is a wholly owned and independently operated subsidiary of Securian Financial Group.
About The Savings Group
The Savings Group (“TSG”), parent company of RateGenius and Tresl (Austin, TX), as well as AUTOPAY Direct (Denver, CO), is the largest and most advanced marketplace for consumers to access automotive financing. TSG facilitates refinance, lease buyout and purchase transactions, in addition to offering consumers diverse protection plan options. TSG assists lenders with expanding loan portfolios with high-performing, seasoned auto loans within their lending guidelines on a pay-for-performance model. TSG delivers loan volume to its lender network through a proprietary, web-based platform, including direct integrations with many of the top LOS providers such as MeridianLink and Origence. The combined company facilitated over $2.8 billion in automobile financing transactions in 2022 and employs approximately 950 team members nationwide, including office hubs in Austin and Denver.