Overcoming Roadblocks to Drive 2018 Sales 

Sponsored by SWBC

After two years of record-setting sales, all signs point to a slight slowdown for 2018 auto sales and, in turn, auto lending. Given the continued growth of the stock market and a low national unemployment rate, the Federal Reserve is expected to increase interest rates three times over the next year. While these rate increases aren’t expected to be astronomical, they’ll likely be enough to change some borrowers’ behavior when it comes to financing a vehicle, slowing the momentum from the record-breaking auto sales experienced over the past four years.

Higher auto loan rates increase monthly payments, which can push buyers to consider driving their existing vehicles longer than they originally hoped or intended. Longer-lasting, more dependable vehicles have made driving an older car much easier and more popular in recent years, with the average age of U.S. cars on the road now at 11.5 years, more than two years older than the average just 10 years ago. 

Drivers who have no choice but to buy a replacement vehicle are more likely to consider buying a used car over a new car when interest rates—and therefore their monthly payments—rise. Quality used cars are easier than ever to find, since the popularity of leasing has led to large numbers of low-mileage, late-model vehicles returning to dealerships. Typically, the used car market sees more cash buyers, leading to fewer opportunities for financing. Overall, buyers who do finance a used car usually have lower loan balances and look to pay off their vehicles quickly.

Roadblocks to Auto Lending

When conditions combine to create roadblocks to growing auto financing portfolios, lenders must think strategically about how to protect both interest and non-interest income revenue streams. 

• While loosening lending guidelines and lending to sub-prime borrowers is an option to locate new borrowers, the risk of default increases as lending criteria loosen, making the benefits and outcome of this option hard to predict. 
• With decreased loan balances, there may be less of a need for a traditional Guaranteed Asset Protection (GAP) product, as loan amounts will stay more closely aligned with vehicle values over time.
• Vehicle protection products can help alleviate the anxiety associated with a used car purchase, since a majority of these vehicles will have already aged out of their manufacturer’s warranty or exceeded mileage limits. Unfortunately, the cost associated with an extended warranty for a used vehicle can deter the purchase of these products for a price-focused consumer.

Driving New Sales with the Next Generation of Protection Products

As consumer purchasing behavior, and vehicles themselves, have evolved, vehicle protection products haven’t kept pace … until now. The new evolution in GAP is GAP with PowerBuy™, which includes benefits to help with vehicle depreciation costs.  

• GAP with PowerBuy takes into account both the vehicle’s loan “gap” and depreciation. Upon a total loss, GAP with PowerBuy pays the greater of the “gap” or depreciation of the vehicle’s value over time, up to a maximum of the purchased PowerBuy benefit amount. 
• The depreciation benefit is applied to the loan financing the purchase of a replacement vehicle with the original lender, meaning your financial institution is guaranteed return business when the borrower redeems the GAP with PowerBuy depreciation benefit. 
• Due to its depreciation benefit, GAP with PowerBuy provides a way for lenders to provide point of sale products to an untapped market, such as borrowers who made a large down payment and may not see long-term value in a traditional GAP product. 

While 2018 may not break records for vehicle purchases and lending, there are still opportunities to grow business and provide value to your borrower. By following new roads to sales, such as the wide range of vehicle protection products available, your credit union will be on its way to a successful and profitable new year.

To see trends and activity to watch, ways to improve the success of your auto lending program, and tips for focusing on promising borrowers, download our free ebook, 2018 State of Auto Lending.

Crystal Bullard is manager/business development, financial institution group at CUES Supplier member SWBC. Headquartered in San Antonio, SWBC is a diversified financial services company that provides a wide range of insurance, mortgage, and investment services to financial institutions, businesses, and individuals. With offices across the country, SWBC is committed to providing quality products, outstanding service, and customized solutions in all 50 states.