Revving Up Sales with a Diverse Lender Portfolio

The auto industry is currently navigating a significant liquidity crisis, impacting both vehicle sales and potential buyers. Economic shifts, including inflation and interest rate adjustments, have challenged buyers to find lenders willing to lend, offer more affordable payments, and be flexible to consider larger debt-to-income ratios. This situation is exacerbated by traditional lenders tightening their auto loan criteria due to fears of delinquencies.

Affordability remains a primary concern for borrowers. Despite a slight decrease in car prices, they remain historically high, with new vehicles averaging over $48,000 and used vehicles over $26,000, according to a recent report from Experian. This financial strain is pushing many buyers to seek more affordable payment options.

The Impact of Tightened Lending

Traditional lenders have scaled back or ceased auto lending, leaving many dealerships and buyers in a difficult position. This is particularly problematic for those who need a vehicle immediately for work or personal reasons. Franchise dealerships can rely somewhat on OEM captive finance companies, but overall, lenders are tightening credit guidelines due to fears of increased delinquencies and economic uncertainty.

Recent data from TransUnion highlights this trend, showing a rise in auto loan delinquencies. Specifically, the delinquency rate for auto loans 60+ days past due increased from 1.43% in Q1 2021 to 1.69% in Q1 2023. This cautious approach has led to a broader clampdown on loan originations, particularly affecting subprime lenders.

Broadening Your Lending Portfolio

To navigate these liquidity challenges, dealerships should consider broadening their portfolio of lenders. This strategy can provide more opportunities for personalized loan terms and competitive interest rates, ultimately helping to sell more vehicles. However, it’s crucial to choose lenders that offer affordable monthly payments, efficient processes, and expedited funding to reduce contracts in transit.

Key Considerations for Selecting Lenders:

• Competitive interest rates: With auto loan rates at a 40-year high, securing even slightly lower rates can significantly benefit budget-conscious buyers. Including credit unions in your lender mix can be particularly advantageous, as they often offer lower rates for used vehicle financing. For instance, credit unions’ average rates for used vehicles with a term of 61 to 72 months was 11.97 percent, as reported by Experian in its State of the Automotive Finance Market report for Q3 2023. In contrast, internal data showed the average rate for credit unions with the same terms was only 7.98 percent. That is actually a considerable difference that would lower monthly payments and save the borrower thousands of dollars over the life of the loan.
• Flexible loan terms: Personalized loan terms are essential for helping buyers afford their vehicles over the loan’s life. According to Experian, the average monthly payments for new vehicles are $725, and used vehicles are $516. Those numbers are unsustainable for most buyers, which is where flexible terms become helpful. We are seeing more borrowers taking longer terms because they are more budget-friendly. The more lenders you work with, the more varied options you can offer these cost-conscious buyers.
• Efficient processes: Streamlining the financing process is crucial for maintaining momentum in sales and enhancing the customer experience. It’s crucial your lending partners integrate with your dealership’s dealer management system and/or customer relationship management systems to eliminate redundant data entry. They should also offer electronic document upload and transmission to speed up processing times and improve efficiency.
• Advanced technology: Quick funding decisions are vital to your business. Lenders now have many options to apply advanced technologies like artificial intelligence (AI) and machine learning to help identify risk and enhance underwriting speed and accuracy, allowing for faster loan approvals and reduced costly contracts-in-transit. These technologies assess vast amounts of data to help identify creditworthiness and potential risk early in the process. By doing this, they are able to offer competitive loan terms, increase lending capacity, and approve more loans faster, which also creates a better customer experience. In addition, lenders use AI for auto-decisioning to identify borrowers with nontraditional credit profiles so lenders can say yes to more applicants and process loans in record time.

In today’s challenging market, the most valuable resource for a dealership is a diverse lender portfolio that includes captive financing, traditional lenders, and credit unions. By expanding lender options, your dealership can better navigate the liquidity crisis and continue to sell more cars, providing much-needed solutions for buyers in need.

With CUDL, dealerships expand their lender portfolio with a vast number of lenders under one platform. This allows you to grow your database with a consistent workflow and minimal lift. To learn more about all the benefits of working with CUDL, contact our team today.