Leaders in the auto finance industry gathered in Texas last week at the Auto Finance Performance and Compliance Summit. Previously called the Auto Finance Risk and Compliance Summit, the new focus on performance makes sense. There’s more to loan performance than risk avoidance: forward-thinking lenders can expand market share, reach previously underserved segments, and increase repayment with the help of the latest technology. This first installment in our two-part auto finance trends series examines how.
Concerns have mounted about the volume of subprime loans (borrowers with credit scores below 600) as that sector has rebounded from its lows in the immediate aftermath of the 2008 financial crisis, when banks were extremely wary of lending. Auto finance is not as heavily regulated as mortgage finance. However, the concerns are likely overblown and in fact, a growing share of auto loan debt (now 61%) has actually gone to prime and super-prime borrowers (Experian defines them as those with scores above 660 and 780, respectively). Delinquency rates are down.
Lenders have leveraged data and analytics, and even artificial intelligence, to identify these low-risk borrowers. However, opportunities remain in subprime lending. While a decreasing share of the population is categorized as subprime, these borrowers continue to be located predominantly in southern regions of the United States. And they aren’t a uniform group. Some consumers are inaccurately classed as subprime. For instance, those with little credit history may in fact be perfectly responsible.
Identifying these consumers and furnishing them with credit could be a great opportunity for banks, who have lost considerable market share to captive lenders (auto makers’ wholly owned financing subsidiaries) in subprime. Subprime loans carry high interest rates, generally over 10%, and can be packaged into high-yield securities as a result. With the low state of interest rates in general these auto loan asset-backed securities (ABS) are very attractive to investors.
Auto dealers and auto lenders have a symbiotic relationship, so making it easier for people to buy a car also drives the volume of auto loans. Dealers, banks, industry organizations and startups have all been exploring how to make the process of buying a car better through technology, with a super-session on digital marketing innovations at the National Automobile Dealers Association conference in March.
Startups including Shift have been working to change the paradigm in private used car sales, a market that is currently vastly underserved by financing: while 85% of new car purchases involve financing, only 53% of used car purchases do. Shift works as a consignment service connecting sellers and buyers, with a thorough inspection service in the middle.
Knowing a car’s actual condition can help buyer confidence, but it can also underpin a decision to offer financing on the purchase. Lemons are useless as collateral, so it’s in everyone’s interest to avoid financing them. One promising technology in this space is Experian’s new tool that helps to track down flood-impacted vehicles by simply scanning the VIN.
Credit unions have made the biggest gains in used car financing, but there remain some hassles in the process. For example, both parties to the sale often have to be involved in signing for the loan. Big banks could easily capture market share here if they innovate with technology and gain more information about the real value of the cars involved.
Which Tech Tools Do You Need?
There is room for both new and existing players to improve the auto purchase and financing experience for consumers, while making good decisions around risk and performance. Katabat powers innovative lending with intelligent solutions that help banks communicate with customers, stay compliant, and automate for maximum operational efficiency. Email us at email@example.com to learn more today!