While the last few years have not been easy on any business, the auto financing industry has faced unique challenges around payment collections, volume, and rising prices. In this article, we take a look at the top five challenges auto lenders face right now and offer suggestions for how to make the best of a volatile situation.
1. Car Loan Fraud
Fraud is a fast-growing problem for the auto financing industry. The primary types of auto loan fraud include:
- Document Fraud: When customers with poor credit scores inflate their income or falsify residency and employer information to get approval for an auto loan they otherwise wouldn’t qualify for.
- Identity Theft: When scammers take out auto loans in someone else’s name by stealing the identities of people with good credit scores.
- Synthetic Identity: When fraudsters use a child’s SSN or fabricate SSNs to create new credit profiles.
Unfortunately, the car loan application process lends itself to fraud. A reliance on physical paperwork and the slow adoption of digital processes make it easy for false information and stolen identities to clear the approval process.
Take a closer look at how your auto financing company processes applications. How many income verification documents actually get checked? How are credit reports analyzed–by human eyes or a system that doesn’t catch discrepancies?
To protect your company against car loan fraud, consider investing in fron-end technology that contains the entire application process to a single digital platform. This makes it harder for fraudsters to succeed. As an added benefit, online applications will increase efficiency for auto lenders. Loan application completion rates also tend to improve with a digital process.
2. Rising Interest Rates
Both auto loan interest rates and average monthly payments are on the rise in 2022. And we may not have hit the ceiling yet. The Federal Reserve plans to continue raising rates until inflation falls to the Fed’s stated goal of 2%. Higher interest rates make borrowing more expensive, which could push more car buyers to purchase used instead of new. Luckily, used car inventory has improved this year from pandemic-era lows.
In this environment, auto loan lenders have an opportunity to promote refinancing. Borrowers who have improved their credit since they first obtained their loan may be able to save money, even with rates rising, by refinancing into a new auto loan with a better rate.
There’s not a lot of margin in auto loans, which is why you need volume. Targeting new borrowers as well as those interested in refinancing can help you improve your volume of auto loans even in a rising rate environment.
3. Affordability
Related to rising interest rates, vehicle prices for both new and used models have been higher since a drop in production during the pandemic led to a mismatch between supply and demand. Now, Americans are feeling the pinch of higher prices across the economy. However, a car is a necessity for most individuals and families, so people will still need vehicle financing for their purchases.
Auto lenders can find opportunity in the used car market. While this segment of the vehicle market has traditionally been seen as higher risk, it may be time to take a second look. Demand for used cars has increased as rising prices for new cars and rising interest rates have pushed monthly car loan payments out of the range of affordability for some consumers.
If you’re not meeting your targets for new auto loan accounts, consider a mail marketing or digital marketing campaign to help you reach more prospects and increase conversions.
4. Debt Collection
Many lenders were willing to work with customers during the pandemic to help people through difficult financial times. However, auto loan delinquencies are still on the rise, according to a recent study from TransUnion. Now the challenge for auto lenders is to demonstrate empathy while navigating a volatile market and trying to lower exposure to risky borrowers. PrintMail can help you with automotive customer communications management, including past-due notices and collection letters.
5. Competition
While financial institutions and dealer financing have historically been the main places consumers go to get an auto loan, today’s market has been disrupted by fintech players. To stay competitive, invest in the technology to create a seamless digital application and account management experience. The ability to quickly check an interest rate and get pre-qualified are also appealing to consumers. You may even be able to partner with a fintech to receive a commission for the leads you generate, while letting another company handle backend processing.
Another way to be competitive is to take a look at your current portfolio of auto loans and reach out to everyone with an origination date of 4 or 5 years ago. These borrowers may be interested in refinance or ready to purchase their next vehicle–with your financing help of course.
Partner with PrintMail!
In a low-margin business like auto financing, automation can help you trim costs and improve efficiency. PrintMail Solutions has been driving innovation and delivering customer satisfaction in communication solutions for more than 20 years. To learn more about our communications solutions for auto lenders, including statement processing, eStatements, or statement redesign, contact us today!
