One of the hot topics at the 2016 NADA Convention was the much debated subprime bubble in relation to rising delinquency rates. Again, industry experts worked to calm everyone’s nerves about Fitch Ratings’ latest report, which brought to everyone’s attention that as of February, 60-day delinquencies had risen to 5.16 percent, the highest rate since 1996. Even so, experts have once again stated that there is no bubble and delinquency rates are rising at a healthy level in conjunction with vehicle sales.
However, with the Federal Reserve raising interest rates by 25 basis points this past December, and the expectation that rates will rise again later this year, it can be posited that lenders will tighten restrictions within the subprime space. The last thing anyone wants is for higher interest rates to coincide with rising delinquency rates, creating a perfect storm that could potentially cause that debatable bubble to pop.
As you evaluate your portfolio risk and determine the best go-forward plan to maintain your market share, consider looking at avenues outside of those traditional lending benefits commonly used by the industry, like APR. While the industry has typically competed for ground on APR, lenders, especially in the subprime space, often have their hands tied on how low they can go due to Federal Reserve rate increases and portfolio risk.
Therefore, with increased delinquency and interest rates, in the coming months it will be more difficult to differentiate your institution from the next based on APR alone. This is why it’s important for lenders to begin thinking outside of the box now. One option that benefits lenders, dealers and consumers is to use consumer protection products, such as a vehicle service contract (VSC).
With a VSC, consumers are protected from the negative financial repercussions if their vehicles experience a costly mechanical breakdown. Consumers can utilize a VSC to cover the cost of a mechanical repair with a small deductible, thus ensuring that they aren’t hit with a repair bill that could hinder their ability to make their monthly auto loan payment.
Put another way, in the event of a major mechanical breakdown, which loan makes more sense?
Brien Joyce, EFG Companies
—Traditional loan: The customer gets hit with a $900+ repair bill and can’t pay both the bill and their auto loan payment. They then become delinquent, and late fees, recovery fees, collection costs, repossession costs, etc. accumulate.
—Loan with a VSC: The customer pays a $50 deductible for their vehicle repair and continues to make their monthly auto loan payment. The next time they are ready for another vehicle, they are that much more likely to return to a dealership that offered them valuable and relevant protection that helped save their wallet. And, having provided a strategic loan that helps increase dealership profitability, that dealership is also that much more likely to keep your lending institution top-of-mind, making you a preferred lender.
Dealerships also benefit by setting up the F&I product presentation with a description of the benefits consumers will receive with their loans. This offers F&I managers an excellent springboard into presenting upgrade options, or additional products, to further protect the consumer.
For example, with a vehicle service contract, dealers can provide customers with the option to upgrade to a combination of longer terms and increased coverage levels. The complimentary product, combined with upgrade options, turns your loan into a dealership tool to create a rewarding and productive discussion about the benefits of consumer protection products, and the value the dealership is providing.
In essence, your loan would have the potential to maximize dealership profitability through the sale of the upgrade, enhance customer satisfaction, and increase repeat and referral business.
Thus, lenders offering products like a VSC have a significant advantage to increase market share and reduce risk.
Don’t let the industry hedge you in to only using APR to differentiate your business and protect your portfolio. Pair your loans with complimentary consumer protection products like a vehicle service contract to protect your loan portfolio, increase loan volume, and make your institution the preferred lender for both dealers and consumers.
Brien Joyce is the vice president of specialty channels at EFG Companies. This commentary was originally posted on the company website. For more details, contact EFG Companies at (800) 527-1984 or through this page.