Automotive Lending

It’s more than mercury that will be up this summer. As temperatures climb, so do automotive sales, which often reach annual highs during the warmest months of the year. Fueled by pent-up demand coming out of the recession, historically low interest rates, and increased competition among both manufacturers and lenders, auto sales are continuing to be a bright spot in the U.S. economy. Summer sales spike According to recent research by Experian Automotive, 2015 sales of new non-luxury vehicles began rising in May and peaked in August at nearly 20 percent above the monthly average for the year. It is not surprising, given the number of notable manufacturer marketing campaigns that often air through the summer months, beginning with Memorial Day and running all the way through Labor Day weekend. The projection is that this trend will continue in 2016. Financing moves metal Financing continues to play an important role in facilitating new car sales. Experian research shows a consistent increase in the percentage of new vehicles sold with financing with the trend reaching a period high of 85.9 percent in Q4 2015, a 2.3 percent increase over the previous year. The increased financing, is due in part, to continued post-recession liquidity. As the economy has rebounded, lenders have re-emerged with attractive financing rates for buyers. In addition, captive lenders are continuing to support manufacturers with 0 percent subvention offers to increase sales. Total loan value is on the rise as well, reaching $29,551 in Q4 2015, a 4.1 percent increase over the previous year. Average MSRP is trending up too, but at a slower year-over-year rate of 3.6 percent. The slower growth in MSRP relative to total loan value is leading to increased loan-to-value ratios which reached 109.4 percent in Q4 2015. The increases in loan value and MSRP are putting pressure on monthly payment with average new vehicle payments reaching $493 per month on new loans in the fourth quarter. Seeking relief, consumers are turning to longer loan terms and leasing to maintain lower payments. As a result, average new vehicle loan terms ticked slightly higher to 67 months while lease penetration on new vehicles reached 28.9 percent, a 19 percent increase over the previous year. Leveraging the trends Timing is everything when it comes to auto lending. Direct mail remains an effective communication tool for lenders, but mass mailers without regard to response rates yield poor ROIs and put future campaigns in jeopardy. Targeting consumers who are most likely to be in the market at a point in time can increase response rates and improve overall campaign performance. Experian’s In the Market Model – Auto leverages the power of trended credit data to identify consumers that will be most receptive to an offer. By focusing on high-propensity consumers, lenders can conduct more marketing campaigns during the year with the same budget and achieve supercharged results. Context-based marketing allows lenders to tailor offers by leveraging insights on a consumer’s existing loans. Product offers can additionally be customized based on estimated interest rates, months remaining, or current loan balance on open auto loans. Targeted refinance offers can also be delivered to consumers with high interest rates or focus new-loan offers on consumers with minimal months or balance remaining on existing loans. Understanding current auto loans allows lenders to target offers that are relevant to their prospects and gain an advantage over the competition. Increases in loan-to-value (LTV) ratios at origination and longer loan terms are putting many consumers in deep negative equity positions. As a result, many consumers will not qualify for refinance offers without significant down payments leading to low underwriting conversion rates and poor customer experience. Lenders seeking to improve on these metrics should leverage Experian’s Auto Equity Model, which provides an estimate of the amount of equity a consumer has in their existing auto trades. Focusing refinance offers on consumers with negative equity, while suppressing those with deep negative positions, can help improve response rates while minimizing declines due to LTV requirements. Takeaways Lenders should be gearing up for the summer auto sales spike. Proactive strategies will allow savvy marketers to deploy capital and grow their portfolio by taking advantage of customer insight. Timing and context matter, and as auto sales trends reveal, now is the opportune time to optimize marketing efforts and capitalize on the season.

Key drivers to auto financial services are speed and precision. What model year is your decisioning system? In the auto world the twin engineering goals are performance and durability. Some memorable quotes have been offered about the results of all that complex engineering. And some not so complex observations. The world of racing has offered some best examples of the latter. Here’s a memorable one: “There’s no secret. You just press the accelerator to the floor and steer left. – Bill Vukovich When considering an effective auto financial services relationship one quickly comes to the conclusion that the 2 key drivers of an improved booking rate is the speed of the decision to the consumer/dealer and the precision of that decision – both the ‘yes/no’ and the ‘at what rate’. In the ‘good old days’ a lender relied upon his dealer relationship and a crew of experienced underwriters to quickly respond to a sales opportunities. Well, these days dealers will jump to the service provider that delivers the most happy customers. But, for all too many lenders some automated decisioning is leveraged but it is not uncommon to still see a significantly large ‘grey area’ of decisions that falls to the experienced underwriter. And that service model is a failure of speed and precision. You may make the decision to approve but your competition came in with a better price at the same time. His application got booked. Your decision and the cost incurred was left in the dust – bin. High on the list of solutions to this business issue is an improved use of available data and decisioning solutions. Too many lenders still underutilize available analytics and automated decisions to deliver an improved booking rate. Is your system last year’s model? Does your current underwriting system fully leverage available third party data to reduce delays due to fraud flags. Is your ability to pay component reliant upon a complex application or follow-up requests for additional information to the consumer? Does your management information reporting provide details to the incidence and disposition of all exception processes? Are you able to implement newer analytics and/or policy modifications in hours or days versus sitting in the IT queue for weeks or months? Can you modify policies to align with new dealer demographics and risk factors? The new model is in and Experian® is ready to help you give it a ride.  Purchase auto credit data now.

Driver of success: Mitigate auto lending risk A culture of learning is a key driver of success. Does your risk culture continue to adapt? There are many issues within auto lending that are unique to other financial services ecosystems: the direct versus indirect relationship, insights of the asset influencing the risk insights, new versus used vehicle transactions influencing risk and terms, and more. However, there is one universal standard common to all financial services cultures — change.. Change is constant, and an institution’s marketing and risk organizations need to be constantly learning to stay abreast of dealer, consumer, competitor and regulatory issues. No one has said it better than Jack Welch: “An organization’s ability to learn, and translate that learning into action rapidly, is the ultimate competitive advantage.” This statement was quickly followed by a command: “Change before you have to.” So the challenge for the portfolio manager is to ensure there are the system features, data sources, management reporting structures, data access features, analytic skills, broad management team skill sets, and employee feedback and incentive plans to drive the organization to a constant state of renewal. The challenge for many smaller and midsize lenders is to determine what systems and skills need to be in-house and what tasks are better left for a third party to handle. For consumer-level data, vehicle history and valuation data, and fraud alert flags, it seems reasonable to leverage solutions from established third parties: credit reporting agencies. After that, the solutions to the many other needs may be more specific to the lender legacy skill set and other support relationships: Are there strong in-house data-management and analytic skills? There is a significant difference between management information and data analysis driving policy and portfolio performance forecasts. Does the internal team have both? Is the current operating platform(s) feature-rich and able to be managed and enhanced by internal resources within tight time frames? Is the management team broadly experienced and constantly updating best-practice insights? Is the in-house team frequently engaged with the regulatory community to stay abreast of new mandates and initiatives? There is a solution. Experian® offers the data, software, solutions, management information, analytic solutions and consulting services to tie everything together for a lender-specific best configuration. We look forward to hearing from you to discuss how we can help.