Developing refinance guidelines that work
Reevaluating lending guidelines, relaxing lower credit minimums, and allowing for higher loan-to-value (LTV) gives financial institutions more opportunities to bring on new borrowers. Managing pre-determined performance metrics – delinquencies, charge-offs, and yield – is the key to ensuring that your program stays on track.
When taking on new borrowers, financial institutions typically want to see two years of credit history and prefer borrowers who are in higher credit tiers. If a potential borrower has a solid payment history, you should consider debt-to-income exceptions. It’s important to remember that you’re putting the borrower in a better position by refinancing their loan, so the likelihood that they will continue to make their payment is high.
Flexibility with higher LTV ratios is an essential part of running an auto refinance program. Higher LTVs are common with refinanced auto loans as the borrower may have purchased the car at a higher interest rate, causing minimal dent in the principal loan balance. This can also be a result of vehicles depreciating upon purchase. Use this to your advantage. Those who owe more on their auto loans are less likely to pay off their loans early. These borrowers will stay on your books longer and make your program more profitable.
Additionally, many financial institutions have strict LTV ratios due to the fear of total loss. However, backend products, such as GAP and Vehicle Service Contracts, may protect you from a loss or a consumer who would normally stop paying due to unexpected car repairs.
Financial institutions looking to grow their auto refinance program and increase profitability should develop a realistic plan to implement these best practices.
