Measured by revenue, the market size of the U.S. auto finance industry was $151 billion in September 2022. By year end, the auto finance industry is projected to have grown by 8.2% – more than two and half times higher than the industry’s 2.9% average growth rate between 2017 and 2022.

While these numbers paint an optimistic picture, in reality, this is an uncertain time for auto lending. Overall economic growth is slowing, customer expectations are on the rise, and the demand for digital auto lending is increasing.

Let’s take a quick look at the top 5 auto finance industry challenges that already have strong implications today and will continue to impact the industry for years to come.

1. Inflation pressure on new loan originations

In 2021, we saw the highest auto loan origination number ever at $734 billion. But in the face of macroeconomic uncertainties, auto loan origination numbers will likely take a hit in 2022 as the ratio of the number of cars available to the number of cars desired corrects itself.

High inflation rates are driving up average auto loan amounts. The average auto loan amount for a new car increased by 5.5% from 2021 to 2022. For preowned (used) cars, the average auto loan amount grew by 8.2% over the same time.

To make it less challenging for customers to make payments on these higher value auto loans, auto finance lenders are extending loan durations. Even though customers ultimately pay more for vehicles in total, with longer auto loan durations, they can make smaller, more affordable auto loan payments over a longer period of time.

2. Increasing auto loan delinquency rates

Auto loan delinquency rates are increasing, creating additional challenges for auto financers and auto loan originators. According to TransUnion, which handles 81 million auto loans in the U.S. alone, the percentage of auto loans that are at least 60 days delinquent hit 1.65% in the third quarter of 2022 – the highest rate for 60 day delinquencies in more than a decade.

Repossession is the path of last resort for auto lenders, but when delinquencies rise, costly repossessions often must follow to allow auto financers to reduce their losses. This scenario will also impact auto loan servicing and collections companies. These companies will need to keep their operations infrastructure ready to handle high volumes of new accounts more efficiently.

3. Changing customer expectations

Ecommerce companies and innovative fintechs raised the bar for customer expectations, creating a fresh challenge for auto lenders. Vehicle buyers today are accustomed to a fast and easy, digital-first process that revolves around their needs and desires. Modern customers put themselves first and are not blindly loyal to any particular auto dealership or auto financing company.

To capture and retain a new, younger audience, auto dealers and auto lenders have to ensure every step in the auto credit lifecycle is smooth and puts the borrowers first. For example, auto lenders have to prioritize rapid responses to customer questions, an easy digital payment process, and fast dispute resolutions.

Investing in technology is often the most efficient way for stakeholders in the auto finance industry – auto dealers, auto lenders, and auto loan servicers – to overcome more demanding customer expectations. Technology designed for the unique requirements of auto financing and collections can revamp customer service operations and create new auto lending and auto loan servicing efficiencies.

4. Labor market constraints and staffing issues

Employee attrition rates in auto finance industry contact centers have always been on the higher side. Now, the ongoing countrywide labor shortage in the U.S. is making hiring, training, and retaining new auto loan collections and servicing agents even more difficult and expensive.

A shift to work from home (WFH) has helped some auto finance companies reduce the costs of operating expensive offices, but also introduced new challenges for auto lenders. Specifically, training, performance monitoring, and managing employees is more difficult for auto finance companies in virtual, distributed environments than offices where managers can regularly walk the floor and provide assistance as needed.

Forward looking auto finance companies are investing in technologies that help them ramp-up contact center loan servicing and collections agents quickly. Software designed especially for the needs of auto finance organizations can also increase agent productivity and effectiveness, so auto lenders can accomplish more with the same (or even fewer) agents. When agents are more successful, thanks to help from software, they are also less likely to leave their jobs.

5. Inefficient auto loan servicing and collections operations

Auto loan servicing and collections operations are a critical part of the auto loan lifecycle, and contact centers play an integral role in the process. Since auto finance contact centers are very labor and resource intensive, it’s easy for contact center operations to bleed dollars and mistakenly introduce compliance risk.

Auto lenders and auto services know that positive customer experiences are critical to retaining customers and expanding their average lifetime value. But, without insights into what’s happening during every customer call, it’s tough for the auto finance customer service leaders to ensure their teams deliver a great experience every time.

Technology that not only monitors and scores every call but also guides agents through every auto loan servicing and collections call in real-time has become more important than ever. With this level of visibility and real-time guidance, auto financers can reward top performers, coach those who need assistance, and prevent compliance violations before they happen.

The great thing about embracing technology especially designed for the auto finance industry, is that it allows contact centers to reduce costs and increase customer satisfaction, without the difficult and expensive task of hiring additional agents. For example, Prodigal is helping Consumer Portfolio Services (CPS) improve the efficiency of its auto finance customer service and collections teams. (Read more about how Prodigal is helping CPS here.)

How can auto lenders overcome industry challenges?

What worked to resolve auto finance industry challenges before may not work as well today. And it’s impossible to control all of the factors impacting the auto loan industry.

So to navigate these challenges, auto loan lenders should focus on the things they can control, like cost and resource optimization, employee retention, and strengthening their auto finance contact center operational efficiency. Embracing new technology is a great shortcut to improving each of these factors in a fast, sustainable way that shows a measurable ROI.