As lenders pull back from the subprime space competition for prime credit is getting ultra-competitive, and lenders are going to have to think creatively to attract customers, said Brian Landau, senior vice president and automotive business leader at TransUnion.
“There’s more competition now and less demand,” Landau said. “It causes some challenges for the incumbents and some of the new entrants.”
But he has a suggestion that could bring more business without increasing risk — refinance.
It’s not a particularly innovative or exhilarating product, but if executed correctly, refinancing can give lenders the edge they need as margins tighten. Here are three ways the product could improve the lender’s portfolio.
1. New Customers
Consumers are well aware of their ability to refinance a mortgage, but less than half of consumers know about auto refinancing — and only 12% refinanced their auto loan last year, according to a Harris poll.
“A car purchase is a big purchase at the end of the day,” Landau said. “It doesn’t compare apples to apples with a mortgage which is why you see more awareness around refinance in mortgages. But you’re talking about $50 in monthly savings and that could be used for a telephone bill — there are material savings there.”
Two-thirds of auto finance companies — excluding captives — mention refi on their websites, but it hasn’t been enough to boost penetration rates. Banks may have the best inroad to capitalize on the trend because they have existing customers with brand loyalty.
“There are some savvy consumers doing refinance within the first 30 days,” he said. “They may go back to their own bank where their direct deposit accounts are because they can get benefits from doing all their financing under one roof.”
2. Remove Dealer Costs
As much as lenders value and rely on their dealer relationships, it comes at a cost.
“You don’t have to rely on the dealership relations — which can be very taxing on banks and independent finance institutions — to get [refi] deals,” Landau said.
Additionally, lenders can always strip out the dealer markup on an indirect finance deal to reduce the rate for the consumer and still make a profit on the loan. The ability to strip out the markup is the key reason that refinance can work in a rising interest rate environment, Landau said.
“It allows the lender to reduce the rate, strip out that markup and make some interest income in the process while saving consumers some money,” he said. “When [lenders] think about refinancing in general, they think that interest rates need to decline — and right now we’re in a rising interest rate environment so why would I even think about refinancing? Well, in auto it doesn’t matter if rates are rising or declining, auto refi is an option no matter what environment you’re in.”
3. Better Performance
The majority of loan defaults and delinquencies occur within the first 30-90 days. So, if lenders can refinance the loan after that window, they can reasonably expect better performance.
“You can get past that early payment default window because if the person is making good on their loans through the first few months they are probably going to make good on their payments going forward,” Landau said.
There are some other factors to consider such as the value of the collateral and making sure the borrower isn’t too close to paying off the principal on the loan because if they are it won’t make the lender much money.
“If you can get it in the right window, capitalize on the fact that your acquisition costs should come down, and have targeted marketing campaigns that leverage digital channels, you can make it worth your while,” he said.