Car payments for Americans are on the rise. Research from Experian found that in the first quarter of 2018, the average price for a new vehicle hit an all-time high of $31,455, while monthly payments increased to $523. Used car prices have also reached record highs: The average price for a previously-owned vehicle hit $19,657 in Q1 2018. up 17.6 percent compared to the same period five years ago. As a result, auto loan volumes are increasing in tandem. In fact, more than 108 million adults in the US have an auto loan—44 percent of the entire country’s adult population.
Auto lending touches such a large portion of the overall population of adults, and more financially vulnerable people hold auto loans than ever before. After the recession, auto lenders increased subprime lending to increase sales, and auto loan delinquency among subprime borrowers has increased from 12.4 percent in 2015 to 16.3 percent in 2018.
Given the increase in delinquencies and rising cost of cars, lenders need to employ new decisioning and underwriting methods, in order to effectively deploy capital to a broader spectrum of borrowers and manage risk. From origination through servicing, auto lenders can leverage consumer financial account data to better understand car buyers’ financial picture and behaviors to create a smoother application experience, improve loss mitigation, and streamline servicing.
During the origination process, auto lenders must find a tedious balance between deploying more capital and taking on too much risk. Similar to personal loans and credit card applications, dealerships, banks, and outside financers depend on credit scores as their primary means for avoiding overly-risky borrowers. However, as lending has increasingly opened up to subprime and thin-file borrowers, credit scores show a one-dimensional view of default risk.
Lenders should look to additional sources of information about an applicant’s financial life to paint a more complete picture of spending habits, income and expenses. With Quovo’s Income and Expense products, lenders gain a window into an applicant’s cash flow, from their salary to any recurring debts and expenses they may have. Responsible cash flow management is a more dynamic indicator of a borrower’s ability to repay their loan, and lenders can make a more intelligent decision with this additional information.
As an added benefit, account connectivity also streamlines the application process online and at the dealership. Instead of the traditional onerous process of completing multiple forms, providing supporting documentation, and waiting, an applicant can simply share their financial account data with the lender directly.
Loan servicing is a complex process. Servicers need to collect payments and liaise with their borrowers while avoiding losses and also focusing on:
- Grounding of leased vehicles to assess mileage and condition;
- Repossession and recovery for those who default; and
- Remarketing of used vehicles after they’re traded in to the dealership.
With those other costs in mind, it’s critical that the most fundamental aspects of servicing—collecting borrowers’ payments while mitigating losses—be as efficient as possible. That’s where financial account connectivity proves its utility.
Once a servicer is connected to a borrower’s financial accounts, they have an ongoing flow of information to service loans proactively. In the short term, the information from financial accounts can point servicers to the best day to draft payment based on the borrower’s historical cash flow patterns and an estimation of their account balance at a future date. With this information, servicers can also minimize non-sufficient funds fees (NSFs), which can can strengthen the relationship with the borrower.
In the long term, a servicer can leverage account connectivity to decrease the potential for loss. Account connectivity enables servicers to monitor for significant changes in cash flow that impact repayment—such as unforeseen expenses, a new job, or an unfortunate layoff—and optimize the borrower’s repayment accordingly. If a borrower’s financial situation worsens, the servicer could even reach out to offer a proactive loan modification to avoid default.
The auto lending industry has plenty of room to revamp its processes, from application through repayment. However, lenders and servicers have yet to adopt the technology that could make a streamlined auto loan lifecycle possible on a widespread scale. Financial account connectivity is the key to creating considerable competitive advantages for lenders and reducing worsening delinquency rates.
Contact our team below if you’re an auto lender or servicer and would like to learn more about how financial account connectivity can transform your business.