Here is some new TransUnion data that could help managers within finance company underwriting departments when looking at an application attached to a vehicle that just rolled over the curb.
According to the recent TransUnion study of 1.5 million refinanced installment contracts originated in 2013 and 2014, there is a spike in refinance activity within a few days of an initial delivery.
“We found that some consumers, especially those interested in taking advantage of loyalty programs and bundled options, will refinance their loans a day or two after the original purchase,” said Brian Landau, senior vice president and automotive business leader at TransUnion.
In a phone conversation with SubPrime Auto Finance News, Landau explained that consumers seeking to refinance typically fall into three categories. There are individuals seeking a lower monthly payment. Oftentimes, these contract holders fall within the near-prime and subprime spaces, according to Landau.
Other consumers are loyal and want their installment contract with their personal finance institution rather than the provider that bought the contract at the dealership. Furthermore, Landau mentioned consumers who are looking to be aggressive, seeking refinancing to pay off their balance quicker and avoid interest.
What might be especially positive for those subprime customers, the TransUnion study indicated that the cash flow benefits from refinancing can be compelling. The average decrease in auto debt service — for those specifically seeking a payment reduction — was $52 per month. The average refinancing consumer achieved an APR reduction of 2.4 percent.
“In an increasingly competitive auto finance market, there is a lot of potential for auto lenders to tap into refinancing as a way to grow their business,” Landau said. “But market education is key.
“Nearly two-thirds of auto finance companies offer refinancing, but according to a recent Harris poll, less than half of consumers are aware they may use this option as part of their overall financing strategy. Broader recognition of this option can benefit both consumers and lenders seeking new business,” Landau continued.
Refinancing is quite prevalent in the mortgage space. Landau told SubPrime Auto Finance News why.
“With a mortgage you’re talking about a very large purchase with a very long term; a 30-year, standard fixed loan. With that, the consumer can become very sensitive to rate changes,” Landau said. “You’re looking for any advantage you can, especially given the collateral. Refinancing mortgages just makes a lot of sense because you can save a significant amount of money. Because of the term, the amount of money and the sensitivity to rate, refinancing has been top of mind for consumers and lenders that provide it.
TransUnion estimated that close to half of institutions (47 percent) that provide auto finance also have a refinance option. That prompted Landau and the TransUnion team to ask, “Why hasn’t it taken off in auto even though many lenders offer it?”
When asked for an answer, Landau replied, “It has to do with a shorter term and people not realizing they can refinance the loan even though they might only be in it for three or four years. Also, they look at it as a depreciating asset with a sunk cost.
“There could be some mental hoops that consumers have to get over to say, ‘There are some opportunities here to save a little bit of money to use elsewhere.’ The lending community also has to do a better job of getting the word out there that auto refinance could be a way to help them manage their monthly cash flows,” he went on to say.
And since auto refinancing happens during the early portion of the term, Landau pointed out that refinance contracts oftentimes perform much better with lower delinquencies.
“It’s a little bit of selection and the lenders being risk averse. Their ability to identify consumers who have the ability to make good on their loan, they can do this through the use of credit data and alternative data,” Landau said.
“What it shows is some lenders are taking advantage of the opportunity because everyone is concerned about early payment default. But once you get past that red zone, the first couple of months, you’re past that risk zone, and you know the consumer is going to make good on that purchase going forward,” he added.
And with summertime beginning to wind down in many places, TransUnion is thinking finance activity could heat up, especially in the refinancing arena.
“The end of summer is generally a key time for the auto industry, as better weather means more consumers are shopping for vehicles. It’s also a time of year when some consumers can find a deal before automakers roll out new models in the fall. This year, the prospect of rising automotive tariffs has also made it a hot time to buy,” Landau said.
“TransUnion found that a number of consumers are taking advantage of the opportunity to refinance their new purchases, despite the rising interest rate environment,” he continued. “Consumers who might be paying a somewhat higher interest rate on the loans they obtained through the dealership may find that refinancing can lower those interest rates or extend the loan term — in other words, help those same consumers manage their monthly cash flows.”
TransUnion plans to discuss more of its research and data during a webinar beginning at 2 p.m. ET on Aug. 23. Registration for the session can be completed here.