You've got a lot to keep track of in auto finance.
Fortunately, we love to eavesdrop, so we're happy to fill you in on what we're hearing.
We've been listening all over, including:
- The AFSA Vehicle Finance Conference and Expo
- AFS East
- The Non-Prime Auto Financing Conference
- Auto Finance News
- ...and beyond
Here are 7 auto finance trends you need to be thinking about right now:
1. Fintech and digitizing operations
Fintech is driving disruption in auto finance throughout the loan lifecycle:
- Approval via AI and alternative data
- Loan processing
- Purchase transparency
- Rates and refinancing
- Dealer connection
- Floorplan management
- Fraud prevention
- Servicing improvements
The reason fintech is making inroads in those spaces and beyond is because they are ripe for digitization - not to brag (okay, we’re bragging a little), but we speak from experience here; we’ve seen firsthand how our solutions can modernize loan servicing and improve customer experience, especially when times get tough - more on that in a minute.
2. Sub-prime wobbles
We all knew delinquencies were coming. Our panel talked about this in our webinar about the top threats to auto finance, and even though the surge is here, everyone's still looking for ways to blunt the impact.
But as one of our panelists said then, in some ways, a sub-prime auto borrower is actually a more reliable borrower because they need their car.
However, we also saw American Car Center and U.S. Auto Sales close earlier this year, and as AFS East organizer Auto Finance News reported, dealers are having to look for new lending partners for subprime.
AFN recapped the core of these conversations from AFS East on this topic here and here, so we’ll defer to them, but we are definitely connecting with our customers who service subprime customers to see how we can make sure they’re working efficiently to keep revenue high and costs low.
3. Prices, rates, and payments
In Experian’s State of the Automotive Finance Market Report for Q1 2023, they announced the average car payment for new cars is $725. And Edmunds says nearly 15% of drivers who financed a car at the end of last year are paying over $1000 a month.
No one was exactly shocked by this news, but what we’re hearing people saying is that those numbers aren’t going to budge for at least the next year.
Used car prices are starting to fall, which normally would be good news, but the continued high interest rates that are influencing those lower prices means non-prime borrowers are more likely to stick with what they have.
Which leads us to….
4. Repo rates
No one likes a repossession - not the borrower, and not the creditor.
So even though delinquencies are rising, what non-prime teams we’ve talked to are saying is that these borrowers are bending over backwards to make sure they’re not missing car payments.
After all, if these borrowers lose their cars, they could lose their jobs. And if they live in areas without easy or reliable public transportation, they’re going to have a tough time getting a new job without a car. We wrote about this recently when our data showed us inflation wasn't the most likely reason for delinquency.
Still, with the coming un-pause of federal student loans, we're buckling our seatbelts, just in case.
All this to say everyone is working to make sure repo rates stay low, with ideas like…
5. Creative repayment terms
In order to avoid those dreaded repos, creditors are getting creative with repayment terms.
The biggest solution that’s not going away - lengthy loans.
Reuters reports: “New car loans lasting 73-84 months (over six years) rose to 34.4% of the market in 2022 from 28.6% in 2018, according to auto information site Edmunds. A few borrowers are going even longer, with less than 1% of new car loans lasting 85 months or more.”
Because interest rates and delinquencies are both expected to stay high for the near term, we’re hearing folks are going to keep those longer loans, even if they end up underwater.
6. Agent coaching and training
“How do I know my agents are saying the right things?”
“Half of them skip around so I’m not sure they’re covering what they need to.”
“We want more training, but our managers don’t have the time.”
We heard auto finance managers say at least a dozen different iterations of these statements at conferences this year - it’s not just hiring agents that’s the issue (though that is one of them!), it’s how you onboard them and continue to train them.
You're not alone in this - we actually hosted a great webinar about this (check out the recap - the secret to agent motivation is…Girl Scout cookies?).
But to go back to our first point, this is where AI and technology shine. Repetitive tasks are boring for humans, but robots don’t care.
So we encourage auto finance servicing leaders to look for options to support their agents - like real-time agent assistance that can reduce ramp time and coach agents through calls so they don’t have to worry about remembering all the compliance pieces on their own.
Or automated call notes so reps don’t have to be distracted by typing during calls. Or AI that tags and scores calls so your managers have the time to spend with agents.
But also, believe us on the Girl Scout cookies. Personally, we would do just about anything for a Tagalong.
And yup, here it is. Moody's reported that new auto loan (and credit card) delinquencies have now passed pre-Covid highs. Those auto delinquencies came in at 7.3% in the second quarter. And CNN reports that "Moody’s warns that new credit card and auto loan delinquencies will both continue “rising materially,” peaking in 2024 at between 9% and 10%, compared with 7% pre-Covid."
That's...a lot of delinquencies.
We know that cars and housing payments are high on people's lists of which to pay first, but watching rates keep creeping up shows us all there's no magic to avoid defaults.