From lender-to-lender: Tips to keep auto finance strong in tough times

In October, Allied Solutions’ CEO, Pete Hilger, moderated a panel on “The State of the Auto Financing Market” for NAFCU’s Virtual Lending Conference. During this conversation, James Schenck, CEO of Pentagon Federal, and Tom Kontos, Chief Economist for KAR Global discussed how lenders can develop strong, safe, and competitive lending programs in our current economic environment. 

Here are a few strategies lenders can leverage to strengthen their auto finance programs, identified during this panel presentation:

1. Refine credit standards and pricing in preparation for increasing risks

It’s important to remain cautious with your credit standards to keep risks lower as more deferral and forbearance programs expire and the full impact of the pandemic – delinquencies and defaults – becomes clearer.

If you are looking to expand into new markets, look at ways you can refine your credit scoring model to more accurately target borrowers within your preferred credit tiers rather than expanding your lending parameters outside of your comfort zone. Pricing risk accurately will help to expand into new markets, without needing to go beyond to your risk tolerance and appetite.

2. Evolve remarketing strategies as repossession volume continues to grow

Repossession volume has grown over the past few months. Dealer demand has kept up with this growth in supply, given that the used car market remains strong among a more financially conservative consumer-base. This balance of supply and demand has helped keep repo values up for lenders. However, repo volume is going to continue growing as delinquencies and charge-offs grow, making it harder for lenders to keep up with the volume. 

Consider outsourcing remarketing processes to a third party that has the tools to scale appropriately and help free up resources to focus on other strategic priorities. These partners are equipped with the technology, data, and expertise to bring about the highest possible returns on behalf of your lending institution.

3. Maintain a good mix in the loan portfolio to increase market share 

Developing a strong, diverse portfolio will help to sharpen your competitive edge and attract more borrowers on an ongoing basis. Here are some front-end and back-end strategies to strengthen your portfolio:

• Partner with fintech on the origination side to enhance and simplify consumer experiences and internal processes.
• Adopt technology to speed up underwriting and allow for same day, instant loan decisions to better compete with digital lenders.
• Put forth omni-channel marketing and advertising efforts (in house or outsourced) to get the word out about what loans you have and to get in front of your target markets.
• Diversify the loan options being offered to your target markets.
• Be more strategic in your mix of direct and indirect loans; indirect lending can be a great tool for opening new opportunities in markets where your institution is less recognizable or has weaker direct lending.
• Price insurance products (i.e. GAP, MBP, Debt Protection) into the loan to mitigate risks with protections paid-for by the borrower.

There are always opportunities to maximize growth through any economic cycle. The key is to step back to learn where opportunities lie within your markets and among your consumers to determine how and where to focus your energy.

Watch “The State of the Auto Finance Market” to dive deeper into lending growth and risk strategies.