iLending Industry Insights—State of Auto/Car Loan Refinance

FinTech innovations across geographies have been changing the auto lending landscape over recent years, and now Fintech companies are extending their innovations to refinance models. The industry has witnessed a shift towards greater use of technology, with innovative platforms being introduced to drive efficiency and enhance customer experience.

Since 2015, the share of borrowers who borrowed using peer-to-peer platforms (including Uber) has increased from 2% to 36%, while borrowers who used online lenders have seen an increase in access to credit from 29% to 47%.

According to a new report by Experian, “Auto Lenders Innovate,” the top three lenders are using technology to improve customer service, increase operational efficiency, and reduce costs. In addition, the number of customers accessing auto loans via mobile apps continues to rise.

Over half of car loan customers borrow from the same lender each time they purchase a vehicle, leading to low switching costs and high loyalty. However, if borrowers change lenders frequently, it can lead to higher interest rates.

About 40% of consumers consider refinancing their existing car loan before renewing their contract. But not everyone takes advantage of the opportunity, with only 14% making last minute refinancings.

By 2020, the total value of the automobile finance market is expected to reach $300bn, with the US accounting for about 50% of the global volume.

Among those borrowers looking to refinance, 58% intend to do so within 12 months, and 75% expect to receive preapproved offers. Of these, 70% would prefer an offer within 24 hours.

In terms of refinance products, 72% of those surveyed said they would choose an equity release product rather than cash.

Most respondents (81%) said they were satisfied with their current financial institution. However, nearly half of consumers (48%) said that they had at least one complaint regarding their bank or mortgage provider.

More than 75% of respondents said they were willing to switch to a lower rate if it meant saving money.

The majority of consumers (85%) said they would recommend their banks to friends and family.

Nearly two thirds (63%) said that they trusted their bank to keep their finances safe. However, less than half (43%) said that they trusted financial institutions to protect their personal information.

Consumers are increasingly turning to third-party providers to help them find financing options. About 44% of consumers turn to a broker, 43% turn to a peer-to-peer platform, and 38% turn to a marketplace or aggregator.

Peer-to-peer platforms continue to gain traction among borrowers, but the popularity of online lenders remains relatively stable. Borrowers tend to favor online lenders due to lower application fees and faster approval times.

iLending Industry Insights—State of Auto/Car Loan Refinance

Auto loans are down 6.9% YoY.

New York (NYSE:NYB), New Jersey (NYSE:JNJ) and Virginia (NYSE:VAH) have seen auto loan volumes decline by 5%-8% year-over-year, while Illinois (NYSE:ILX) and California (NASDAQ:CAKE) experienced loan volume declines of 5%.

Lenders are refinancing auto loans at an all-time high.

Refinancing car loans increased by nearly 12% sequentially in the third quarter, reaching $1.8 billion, according to Experian Automotive’s Q3 2017 U.S. Auto Finance Trends report. Lender activity has been particularly strong in states where vehicle prices were higher than the national average in 2016 and early 2017. In New York, lenders refinanced about half of their total number of outstanding auto loans during the quarter—a record high.

The average loan term remains near five years.

The average current auto loan period decreased slightly in the third quarter compared to the second quarter, reflecting the fact that some borrowers refinance earlier than others. Overall, the average current auto loan length was 4.8 months in the latest three-month period, compared to 4.9 months in the previous quarter.

The subprime market continues to shrink.

Auto finance delinquency rates remain relatively low across all segments of the subprime auto lending portfolio, Experian said. Total accounts delinquent decreased by 2 basis points in the third fiscal quarter, falling to 0.88% of total outstanding balances from 0.90%, while nonaccrual (credit risk) balances decreased by 1 basis point to 0.21% of total outstanding balances.

Credit card debt continues to rise.

Credit card usage among consumers has grown rapidly over the past decade. According to Experian data, credit card balance charges rose 29% between January and September 2017, accounting for 16.1% of total consumer spending in the first nine months of the year.

Refinance activity slows.

In July, Experian began tracking the dollar amount of originations by lender type. Lenders refinance fewer auto loans than they originate, with mortgage companies accounting for 64% of originations and auto companies for 36%. Mortgage originators originated 8.9 million auto loans worth $14.78 billion in the third quarter, including $2.16 billion in auto loans secured by real estate. By comparison, auto originators originated 10.9 million auto loans valued at $18.84 billion in the same period, Experian noted.

Vehicle pricing

Vehicle pricing continued to trend upward, with year-over-year price increases accelerating to 9.0% in October, according to Edmunds’ annual Most Affordable Vehicles Survey. Of the vehicles listed, 38% were priced below $25,000, compared to 34% last year.

iLending Industry Insights—State of Auto/Car Loan Refinance

iLend’s latest study shows that auto loans have surpassed mortgages to become the second largest loan type in terms of volume, after student loans. In addition, while refinancing activity is slowing down, car loans are still attracting borrowers.

According to iLend’s report, the average number of loans per borrower peaked at $22,000 in 2009, before falling to below $20,000 in 2011. However, while the average loan amount was near $19,500 last year, the total volume of auto loans climbed to $2.5 trillion, making them the second-largest loan category in the U.S., behind only student loans.

The biggest driver of the industry remains low interest rates, which have fallen over the past five years to levels not seen since 2007. According to Freddie Mac data, the average rate for 30-year fixed debt fell 0.7% in December 2012 to 4.42%, the lowest level since May 2008.

While lower borrowing costs make refinancing seem attractive, many lenders say they are receiving fewer inquiries about auto loans than they were just two years ago. That’s due in part to rising delinquency rates among subprime borrowers, according to Fitch Ratings, which noted that delinquencies increased across all credit grades, particularly in the subprime segment.

Another factor affecting the industry is stricter lending guidelines from regulators, including new rules around how much equity investors need to put up before getting access to cheap money. Many subprime borrowers are still unable to get financing without significant down payments, even though their incomes may exceed the maximum limits set by regulators.

In fact, the number of borrowers who borrow against the value of their home has declined by nearly 50% since 2010, according to the Mortgage Bankers Association (MBA). As a result, some experts believe that banks may be sitting on excess inventory of unsold cars.

There are several reasons why borrowers are choosing to finance a vehicle rather than buy it outright. First, cash buyers typically pay less in interest, as long as they meet certain requirements. Second, dealerships often offer incentives to those who finance a purchase instead of buying it outright. And if they take out a loan, they can often negotiate additional perks, such as lower monthly payments or smaller down payments.

For example, the average price of a car financed in November 2012 dropped 6.8% to $27,977, compared to the same month last year. On top of that, the average interest rate paid on an auto loan in the fourth quarter was 5.54%, compared to 5.73% in the prior period.

But despite the strong demand for auto financing, some financial institutions aren’t convinced that it’s a good business decision. “We’re finding that our portfolio of assets is already high enough,” said Mark Zandi, chief economist at Moody’s Analytics Inc., in New York. “And given the weak economy and the prospect of higher unemployment, we think that the risk of bad loans is likely to rise.”

Despite concerns about the state of the economy, auto lending isn’t expected to drop off significantly anytime soon. Borrowing activity should remain steady until job losses hit the manufacturing sector, especially in the transportation sector. But once that happens, lenders expect consumers’ spending habits to begin to shift away from purchases in favor of investments.

That means they’ll want to keep their portfolios filled with other types of loans, like housing and student loans. “Once you’ve lost employees in the manufacturing space, you can expect people to start pulling back from those big purchases,” Zandi said. “It seems pretty clear where that would lead us—back toward lower consumer spending.”

iLending Industry Insights—State of Auto/Car Loan Refinance

(2016)

A total of $13.9 billion was spent on auto loans in 2016. That’s about a 14% increase over 2015.

In 2016, 17 million consumers borrowed money to purchase their first cars. That represents a 1% decline over last year.

The average amount borrowed for a new vehicle was $29,300. About two-thirds of auto loan borrowers took out financing from a bank, credit union, or other lender—not directly from the dealership.

There were approximately 16.8 million cars sold in 2016. Sales increased 2% in 2016 and accounted for 23.4% of all retail sales.

The number of used vehicles purchased in America reached a record high of 9.2 million units. Used vehicle purchases grew 4% over 2015 levels.

Car manufacturers continue to invest heavily in technology. According to industry analyst Kelley Blue Book, the top ten best-selling cars of 2016 had an average age of 5 years old.

More than half of the cars sold in 2016 came from just five states—California, Texas, Florida, Arizona, and Michigan.

The U.S. economy added 228,000 jobs in November, marking the sixth straight month of job gains above 200,000.

Retail sales rose 0.7% at an annual rate in October, following increases of 0.7% in September and 1.0% in August.

Consumer confidence continued its upward trend in November, hitting a six-year high. Consumers’ assessment of current economic conditions improved to -12 in October, from +11 in October.

iLending Industry Insights—State of Auto/Car Loan Refinance

A 2018 report published by iLend shows car loan refinance rates reaching record highs of 5.97% in 2017.

The national average rate was 4.72%. However, some states had higher rates than others. California’s average rate was 6.41%, while New York recorded 8.35%. The lowest rate nationwide was 2.68% on average.

Refinancing auto loans is becoming increasingly popular as people look for ways to save money and improve their credit score. In fact, the number of borrowers refinancing in 2017 grew by 25% compared to 2016.

According to Experian data, the total amount owed on auto loans reached $1 trillion at the end of last year, a 15% increase from the previous year.

According to the National Automobile Dealers Association (NADA), the industry added nearly 200,000 jobs in 2017, a 10% increase over the prior year. Meanwhile, employment among dealerships increased 1.9% to reach a record high of 1.43 million employees.

In terms of sales volume, the top five vehicle categories based on NADA estimates were luxury cars, trucks, SUVs, minivans, and sports utility vehicles. In 2017, these five categories accounted for about 58.7% of all sales.

Over the past decade, car ownership has grown significantly. As of 2015, approximately 80% of households owned a vehicle, up from 76% in 2005.

People who have been laid off and who still need to make payments on their cars may find it difficult to get a new loan. If they do find financing, it won’t always be possible to take advantage of lower interest rates.

Lenders don’t want to risk lending money to someone who could lose their job again if he misses a payment.

Consumers should keep in mind that lenders aren’t obligated to offer them financing on their current car unless they’ve done something to improve their credit rating.

When looking for financing, consumers should research what potential lenders require before applying for a loan. Many banks now conduct online credit checks, which can show whether any late payments exist on a consumer’s record.

Borrowers should also check to see if a lender requires proof of income.

Another thing to consider is how much equity the borrower owns in the vehicle. Most lenders will not finance a purchase if the vehicle is fully financed.

While many people think refinancing a car loan means paying less, that’s not necessarily true. Depending on the type of loan being refinanced, there might be additional fees.

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