It’s no surprise to anyone that many of the same challenges that impacted the auto lending market in 2018 will continue to pose challenges in 2019.
Rising interest rates, tightening credit, and the steady increasing price of new vehicles will all offer some speed bumps. However, low unemployment, slight wage increases and continued consumer confidence should provide counter-balances to help offset these trends.
Reports issued in December bear out this dichotomy. According to TransUnion, consumer demand for credit, including credit cards, personal loans and auto loans, will remain high in 2019. Delinquency rates should remain normal-to-low with subprime and near prime borrowers seeking opportunities to access credit.
Juxtaposed is a Moody’s Investors Services report stating that credit conditions are set to weaken next year as the overall economic growth slows, liquidity tightens and market volatility returns.
Given these pros and cons, what will be the net direction for auto lending in 2019? We see some challenges and opportunities for lenders interested in growing their portfolios.
First, the competitive climate in the auto lending market should remain strong in 2019. Rising wages and positive consumer confidence could drive new customers to dealerships.
However, these customers might trend toward subprime, near prime or “credit invisible.” Lenders interested in expanding their books of business by providing more subprime and near prime borrowers with loans will need to carefully vet these customers, even leveraging alternative data to meet qualifying requirements.
We’re already seeing lenders who previously pulled out of the subprime market re-evaluating that decision. In order to compete, lenders will need to find ways to differentiate their auto loan offerings outside of rate. Focusing on providing complimentary consumer protection products should help increase loan volume by providing customers with more value outside of annual percentage rate.
TransUnion also forecasts that auto loan originations will grow from 28.5 million in 2018 to 29.4 million in 2019. But, a large percentage of those loans will be tacked to used vehicles. Moody’s Analytics forecasts that the used car and truck consumer price index will post a year-over-year decline of 1.07 percent in 2019, slowing from a 3.63 percent decline in 2017.
Forecasts for new car sales is pegged at 1.7 percent. With a robust market for certified pre-owned and general used vehicles, lenders interested in diversifying their portfolio will be well served targeting consumers purchasing used vehicles. Once again, providing complimentary consumer protection products on pre-owned loans can help protect the loan portfolio from risk and increase non-interest-bearing income.
Just as auto dealers are focused on customer retention, lenders interested in growing their portfolios must accept the fact that 2019 will be a buyer’s market. Customer focus, centered around communication, engagement, and loyalty will separate the winners from the losers.
Lenders must become more educated and confident in presenting consumer protection products in a consistent manner, generating higher penetration rates, additional profit, protection for the consumer and an additional reason to stay in contact.
Lenders must also make themselves more accessible to consumers, encouraging more input and engaging in a two-way conversation. New customers are likely 20 to 40-somethings who expect a provider to work for their business. These Millennials prefer digital communication and demand working with providers who put their interests first.
Lack of customer service will not only lose a customer. It will also result in a negative review on any number of public review sites. Lenders who put a human face on auto lending, meet the customer’s needs, and provide ongoing support will be the ones who not only gain new business, but retain that business for years to come.
Just as today’s customers are quick to post a negative review, positive comments on good service carry just as much weight. Word-of-mouth advertising has gone digital, so savvy lenders need to take time to upgrade their websites, direct marketing and social media. These tools are extremely useful when communicating with customers, building a relationship and locking out the competition.
Next year will pose opportunities and challenges for lenders in the automotive market. But with a little attention to detail, it can be a profitable one.