Banks have room to reclaim lost ground in auto finance
At the onset of COVID-19, the automotive industry saw a steep decline in sales as some consumers were suddenly left without reliable income, and some dealerships were suddenly left without business.
Unsure how long the pandemic would last, automakers quickly found a way to drive business—offering incentives like reduced interest rates, low money down and cash back. Vehicle shoppers were clear beneficiaries of the new incentive packages, but so were captive lenders. As shoppers took advantage of incentives, captives saw their market share increase—particularly in the new vehicle market.
What does that mean for banks? They saw market share decrease; however, as the industry begins to see business rebound and recover, there’s opportunity for banks to regain market share and drive business in a world recovering from COVID-19, especially as automakers scale back incentives.
According to the most recent Experian report on the auto finance market, captive lenders underwrite more than 60 percent of all new financed vehicles, up about five percentage points from 2019. By comparison, banks saw a sharp decline of nearly 15 percent. That said, much of the decline can be attributed to the early stages of COVID-19.
Captives have always had the lion’s share of the new vehicle market, but now with fewer incentive packages on the table, banks are taking back share. We are seeing positive results from consumers expanding their financing options, but to continue the trend, banks need to understand who is buying, as COVID-19 has shifted consumer purchasing habits.
Prime consumers (46.6 percent) made up the largest segment of vehicle shoppers opting for new loans, followed by super prime (28.3 percent) and non-prime (16.7 percent). Every in-market vehicle shoppers’ situation is different, and banks need to prioritize affordability and find ways to help them maximize their budget.
For years, consumers have taken advantage of longer loan terms to make monthly payments more affordable, but with low interest rates, long-term loans could make the entire loan more manageable. The average loan term for a new vehicle in Q2 2020 was about 72 months, with nearly 40 percent of new loans falling into the 61- to 72-month range. The average interest rate for a new vehicle was 5.15 percent, falling to 4.2 percent and 3.24 percent respectively for prime and super prime.
Affordability will be top of mind for many vehicle shoppers in the coming months and beyond, so the more banks understand about the types of consumers entering the market, the better positioned they will be to offer loan terms that minimize risk and meet a given consumer’s specific circumstances.
It’s long been considered that longer loan terms open consumers up to potential default, but looking closer, longer terms can in some circumstances be a budget-savvy option. Take for instance the average loan amount for a new vehicle of just over $36,000 and the average interest rate of 5.15 percent. With a 60-month-term, the monthly payment would be approximately $683, while with a 72-month loan term, the monthly payment would come in around $583.
Like the new vehicle market, the used market also shows promising opportunity for banks. In fact, used vehicles made up the majority of vehicles financed—in Q2 2020, roughly 59 percent were used. While banks suffered a decline in the used vehicle market spurred by the pandemic, they have a distinct advantage in this space. Banks currently have the most market share of used financing at about 35 percent. Continuing to focus on the used space and finding ways to make these vehicles more affordable—at least for the coming months—will provide opportunity for banks to regain automotive market share.
While captive lenders may be leading the new vehicle market, banks have an opportunity to not only regain, but also to grow lost market share in the new vehicle space. The best way to evaluate current strategy and inform future strategy is by keeping track of the ever-changing trends in the automotive industry. By assessing these trends, banks can position themselves as prime lenders for consumers, and in doing so, help consumers finance vehicles on terms they can afford.