LOMBARD, Ill.—While the auto lending market looks rosier today than it has for a number of years, with new vehicle sales reaching 17.5 million units in 2015, lenders should take steps to prepare for a slowdown.
Research conducted by Raddon Financial Group shows that of the consumers who intend to make a vehicle purchase in the next two years, 13% intend to make a new vehicle purchase.
Pat Bator, in the Raddon Report, compared those findings to the 16% of all consumers who actually made a new vehicle purchase in the previous two years. Add to that, higher interest rates are likely coming.
“The auto lending market may soon slow due to waning consumer demand and projected higher interest rates,” said Bator.
Raddon’s National Consumer Research shows that one in six consumers made a new vehicle purchase in the last two years and two-thirds of those new car buyers took out a loan to fund their vehicle purchase.
However, Raddon data also show that 8% of all consumers are expected to take out a loan to fund their new vehicle purchase in the next two years.
“Higher interest rates may complicate this new vehicle sales market projection. A recent Federal Reserve Bank of New York report predicts that in the short-run, a 100-basis-point increase in interest rates will cause light vehicle production to fall at an annual rate of 12%, and sales to fall at an annual rate of 3.25%,” explained Bator. “Although it is hard to predict what action the Federal Open Monetary Committee will take, make no mistake, an increase in interest rates will impact new vehicle sales volume. Correspondingly, automakers are prepared to offer new incentives and financing options to attract new vehicle buyers to sustain sales volumes. Financial institutions also must be prepared to take steps to sustain their new auto loan sales volume in the face of such challenges, if they have not done so already.”
Bator said steps to consider include:
- Review risk-based lending processes and procedures. “Raddon’s research shows the inherent risk associated with prospective individual borrowers. Financial institutions must review the parameters of their risk-based lending programs to ensure proper lending policies and procedures are maintained, pricing ranges are sufficiently broad to accommodate low-risk, average-risk and high-risk borrowers, and prices (offered loan rates) reflect the risks and costs involved,” said Bator.
- Streamline online loan application and approval processes. Raddon found consumers who apply for a loan online are younger, higher income consumers who expect and demand a “seamless” application and approval process. “Financial institutions are encouraged to simplify their online loan application and approval processes to leverage the demand for new auto loans from online shoppers,” said Bator.
- Circumvent the auto dealer at the point of purchase. According to Raddon’s research, consumers typically obtain dealer financing for new vehicle purchases. “Financial institutions then need to counteract the point-of-purchase influence of the dealer by offering pre-approved loan status and ‘better-than-zero’ financing options,” said Bator.
- Target existing new auto loan users for a new auto loan. Raddon found consumers who made a new vehicle purchase over three years ago are more likely to be in the market for a new auto loan in the next two years. “Financial institutions are encouraged to identify maturing new auto loan users and pre-approve them for their next new auto loan,” Bator said.