While there remains concerns and gnashing of teeth post-inauguration, one economic bellwether seems to be doing just fine. The New York Stock Exchange posted record highs in February, with the Dow Jones Industrial Average charting new highs and the S&P 500 breaking new ground. One of the clear winners is the financial sector charting a 22 percent increase since Q4 2016. Other market indices are also experiencing positive gains. The consumer price index (CPI)
Many of those dollars are flowing into the car market. American automobile debt hit a record in the fourth quarter of 2016, according to the Federal Reserve Bank of New York, topping out at $1.16 trillion. This translates to every licensed driver in the U.S., on average, owing about $6,100 in car payments. While this sizable number has some looking for a bubble, others are eyeing increases in delinquencies. While late payments on vehicle loans are rising, they are still lower than delinquencies on student loan debt and credit card balances. According to the Federal Reserve, recent delinquencies are impacting carmakers, while bank and credit unions have actually seen an improvement in late payment data.
If you step back and take a macro view, it would appear we have a tale of two data points. On one hand, the stock market is flourishing and the CPI is strong. On the other hand, Americans are racking up more debt than ever before. Have low interest rates and easy money prompted the average consumer to become highly leveraged? As a credit union lender servicing the retail automotive market – or considering entering the market – is there money to be made?
Predictions
According to the National Automobile Dealers Association (NADA), U.S. new vehicle sales are expected to stay above 17 million in 2017, roughly on par with last year’s levels. Based on Q1 predictions, it appears the market is on track to meet those expectations. As a lender, you have forecasted roughly the same loan volume as 2016. However, some economic factors could have lasting repercussions on your loan volume.
Let’s start with rising vehicle prices. Every year, vehicle prices rise as the cost of making a car rises. Under the current administration, it appears that manufacturing costs will increase more than in years past due to the potential disruption of trade agreements between the U.S. and Mexico. Depending on the percentage increase, consumers may reconsider purchasing a new automobile, thereby reducing the number of vehicle shoppers.
With the combination of rising vehicle prices and interest rates, lenders are closely evaluating subprime auto loans. At EFG, we expect more lenders to reduce originations in that space, thereby shrinking the available pool of loans and creating a race for loan volume in the prime spaces. To be successful in this new climate, we recommend that lenders proactively engage with dealers to protect their existing relationships and maximize loan volume.
Lenders are not alone in preparing for an unpredictable economy. Dealers seeing 25-30 percent of their current profit derived from F&I products will set stretch goals of at least 35 percent in the second half of this year. Expect dealers to re-evaluate their lender roster to make sure they are partnering with a broad spectrum of lenders that specialize in the different credit tiers.
In addition to flexible lines of credit, dealers will also evaluate lending partners willing to support the growing 365/24/7 aspect of car buying. The number of millennial and Gen Y car buyers who desire to complete more and more of their car purchases online – and after 5:00 P.M. – continues to grow at an increasing pace. Typical “bankers’ hours” no longer work for them. Competitive lenders will think beyond the basics of funding the vehicle, advancing on F&I products, as well as the process for automatic approvals and denials. Lenders who provide staff to support dealerships close deals after hours will likely find they become a preferred partner with the lion share of loan volume.
Relationships matter now more than ever
Strength of relationship will also become a determining factor for dealers evaluating their lending partners. Loan managers who set up in-dealership meetings to collaborate on the management of look-to-book, contracts-in-transit, and discuss changes to credit qualifications have the advantage. Support staff who are on-hand to evaluate/troubleshoot contracts in real time will get the business more frequently than another lender that only provides an automated phone number.
Lastly, just as all boats seem to be rising with the current stock market gains, lenders who help dealers maximize their profit opportunity will also benefit from increased loan volume. Lenders with an up-to-date tool kit of options to increase profit margins in a compliant manner will get the phone call. Options such as complimentary consumer protection products, like vehicle service contracts or vehicle return protection, will decrease delinquencies and defaults. Providing complimentary products helps set the stage for F&I managers to upsell customers to enhanced or expanded coverage, making it possible to increase your margins in addition to the dealership’s PRU.
While a macro view of today’s economic climate shows a tale of two data sets, a micro view of credit union lenders’ approach to their automotive dealers reflects some clear viewpoints. Relationships, strong support, and options to boost profitability can boost revenue for both lenders and dealers. We can’t affect our political climate, but we can take some steps to shield our business from the whipsaw.
