The massive U.S. auto market and its associated credit industry have been sharply altered due to changes in consumer behavior. Heading into 2022 and beyond, the impact of ecommerce and environmental concerns, along with economic factors, creates a classic “challenge/opportunity” scenario for the many financial institutions active in auto finance.
Typically, car-buying was an in-person affair. Most consumers wanted to “kick the tires” before purchasing a new vehicle. Credit unions and banks, which largely dominate the auto financing market, have arrangements with dealership finance departments, which has brought many new customers to these institutions, despite stiff competition from captive financing and other options.
Even before the pandemic, this scenario had been undergoing change. But the combination of lockdowns along with consumers being flush with cash during 2020 brought auto buying to the digital world, as online platforms such as Carvana and Vroom saw massive growth. Many of these online sellers specialize in used cars, a particularly hot item due to the global chip shortage hampering new-car production.
Trend One: Digital Integration with Online Car Buying Platforms
This digitally-powered trend provides a big opportunity for traditional auto lenders to associate themselves with these platforms, says Rutger van Faassen, an analyst at data and consulting firm Curinos, which advises financial services companies.
“Community banks and credit unions need to make it a priority to have conversations with these online platforms, just like they are looped in with the F&I manager at dealerships,” van Faassen says, referring to finance and insurance managers.
Some of these online auto dealers already have financing options established. Vroom, for example, offers in-house financing in conjunction with Chase, but also works with other lenders. Carvana claims to handle its own financing in-house, but customers can get financing through banks and credit unions it partners with.
Financial Institutions Need to Ensure they are integrated as financing options with online car buying platforms.
Furthermore, institutions that have invested in improving their own digital experience can use this opportunity to attract new customers to other financial products, van Faassen states.
“If you are a credit union or a community bank with a great digital experience, and the customer sees that [via the auto financing experience], that gives you an opportunity,” he adds. “With digital, consumers don’t even have to be in the same geographic region.”
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The Carolinas Credit Union League (CCUL) agrees with this notion, advising its member institutions to “speed up your digital transition to online auto loans. Develop loan origination systems that are streamlined and online from start to finish. If your credit union does not have internal capacity, move your transition along, with support from trusted system providers.”
This will become a necessity, van Faassen believes, as the car buying market will be splintered between in-person and digital buying going forward, much more so than in the past.
“There will be people who want to go back [to dealerships] and do everything in person,” he says. “But there are others who have seen how convenient it is to use digital platforms and will want to continue.”
van Faassen draws a parallel with the early days of ecommerce, where conventional wisdom said consumers would not want to buy clothes online because “they have to try them on before buying. Now, it’s commonplace.”
Trend Two: Rise of Electric Autos
Another key for auto lenders to remain competitive is to be involved in the burgeoning electric car market. CCUL notes that in the first quarter of 2021, electric vehicle sales grew 45% year over year and accounted for 8% of all new vehicle sales.
“Begin preparing for the growing adoption of electric vehicles and the eventual adoption of autonomous vehicles,” the group advises. “Offer home equity loans to help members install home electric vehicle charging systems.”
Furthermore, lenders can look to become associated with programs that are designed to facilitate the purchase of electric cars.
Sales of electric cars are on the upswing, providing an opportunity for lenders to finance them with tailored loans.
Already consumers have the option of taking out a “green car loan,” a type of car loan designed for zero-emissions vehicles.
As described by Bankrate, a green car loan is offered as an option for electric or other eco-friendly cars including hybrids. “Green auto loans incentivize shoppers to consider these environmentally friendly vehicles by offering interest rate discounts, extended repayment terms and other benefits,” Bankrate notes.
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Some credit unions have begun offering such loans, and any auto lender should consider doing so as well in order to remain competitive now that electric vehicles are becoming increasingly popular. As widely reported, Ford alone is spending $30 billion-plus in electrification through 2025, including a vast new factory complex in Tennessee to produce electric F-Series pickups.
Trend Three: The Refi Opportunity
A third area that presents auto lenders an opportunity for a competitive advantage is in refinancing. Data from Transunion, cited in a report by digital lender Upstart, notes that of consumers who refinanced an auto loan, 86% saved over $10 a month. This indicates “a willingness for consumers to lessen monthly expenses, even if the amount is as low as $10,” the report states.
“We discovered that more than 25% of existing auto loans… could be refinanced to save borrowers at least $20 a month,” the report adds. “That can translate to an opportunity worth hundreds of billions of dollars in potential lending.”
Other reasons that refinancing is an attractive option for lenders, Upstart notes, include not having to target consumers who are in the market for an auto purchase, which can be difficult to detect, as well as the fact that there is less potential risk, as these applicants already have a track record of loan repayment.
Ultimately, Curinos’ van Faassen says auto lenders must make sure they are involved with all of the many new avenues that consumers can use when financing a vehicle.
“Most people don’t think much beforehand about lining up financing — it’s a split-second thing that happens when they make that decision to buy a car, wherever it may be,” he says. “So you want to make sure you are there as an option when that decision is made.”