Any time an industry shows the ability to sustain a certain level of growth for a significant amount of time, lenders everywhere participate in a familiar ritual of evaluation, estimation and determination: Is this shift for real and does it have staying power?
Recreational vehicles (RVs) have blossomed into just such an industry over the last 10 years. It’s not that RVs are a new phenomenon – they’ve been fairly mainstream since the early 1970s and have surged in popularity in the 21st century (a point I’ll revisit in a moment).
What has changed, however, is that over the last decade the RV market has seen a rise in the large dealer group model, much like the auto industry. Also like the auto industry, it’s attracted business leaders and top talent from other industries.
What this means is the RV industry is now enjoying many of the benefits that have supported the auto industry for years, such as:
· Strong dealer associations
· A large auction network
· Predictable and stable used product values
· Consistent commercial and retail financing
In addition, a combination of more Baby Boomers retiring and an explosion in younger first-time buyers is driving RVs to new heights of popularity with consumers. Consider the premium that millennials, now the demographic with the most buying power,1 place on experiences outside the routines of daily life, particularly outdoor activities (including camping, tailgating at sporting events and weekend getaways, to name a few).
Roughly 75 million households in the country actively camp, according to Kampgrounds of America data, while the National Parks Service reported overnight visits in tents or RVs in 2017 hit their highest level in 20 years.
Finally, manufacturing discipline has led to consistent investment in product development and improvement, creating longer-lasting, lower-maintenance vehicles that retain their value – a critical development for a purchase that’s more akin in scope to a mortgage than an auto loan.
Combine these factors under leaders with a vision for sustainable success in the RV industry, and outside of some external economic catastrophe there’s no reason to think that this upward trajectory will change any time soon.
This same market confidence has continued to drive dealerships to invest in the technology and infrastructure necessary to improve their customers’ experience while efficiently running their business, making them increasingly attractive financing partners.
So, the question ultimately becomes not “Is this for real?” or “Does this have staying power?” (it undoubtedly does) but rather “How does the smart lender best leverage this opportunity while minimizing risk?”
The smart lending target
To answer that question, it might be worthwhile to ask another: We might accept that industry growth, bullish outlook and private investment have attracted several national and regional lenders to the abundant financing opportunities present in the RV industry, but what is it that makes them stay? Why have they continued to serve this market?
As I alluded to earlier, it’s important to draw a clear distinction between RV lending and auto lending. There are similarities, but lenders are staying engaged in the RV market because the competition is fundamentally different.
One major factor is the lack of subvented rates and terms, providing lenders with a more level playing field. What this means is the ability to structure loans that hedge against risk and produce target yields is more attainable. It also means lenders are able to command higher interest rates and down payments while avoiding adverse selection.
Of course, the success or failure of any financing partnership ultimately rides on the nature of the industry’s consumers, so let’s consider the type of people making RV purchases. Overall, RV customers have a higher net worth with more disposable income than the average customer engaged in a comparable transaction, according to the RVIA. Remember, a significant number of this demographic consists of retiring, financially secure Baby Boomers.
Plus, RV lenders have another advantage over their auto lender counterparts in that the increased loan size and discretionary nature of the purchase often means customers and dealers are more willing to provide proof of income and assets, helping create a more thorough and disciplined underwriting process.
I mentioned previously that an RV purchase often resembles a mortgage more than an auto loan, at least in the size and length of the loan. However, the regulatory burdens of an RV loan are substantially lighter than a standard mortgage loan, making this an even more attractive market.
In addition, there’s a substantial difference in the sheer amount of support and expense required to originate and service a similar size home mortgage and an RV loan. This burden is further alleviated by the innovation of technological solutions available to lenders in certain industries (including RVs), such as web-based software that automates many of the tasks associated with indirect lending – receiving electronic credit applications from dealers, for example.
Every year, lenders everywhere repeat the familiar ritual of evaluation, estimation, and determination, deciding which lines of business they want to devote their time and capital to.
Increasingly, those associated with the RV industry have chosen to increase their investment based on the performance of both their own portfolios and the market at large. This is no accident: A perfect convergence of factors, from demographic changes to product improvement to dealer innovation, has resulted in a surge in RV popularity that shows no signs of slowing down.
As the market matures and additional data leads us back again and again to this same conclusion, it may be time to revisit your strategy and decide if you’re ready to pursue the smart lender’s target.
