3 Auto Lending Questions for 2021
Ask these questions to build an auto lending program that grows market share, increases yield and provides digital solutions.
“Now what?” remains the question as financial institutions continually adapt to new challenges and consumer needs for auto financing. While auto purchases continued throughout 2020, how and where they were purchased had to pivot to a digital environment due to social distancing and other safety protocols brought on by the COVID-19 pandemic.
Consumer behaviors were already shifting to online buying when it came to purchasing a vehicle (even before the pandemic), but now in 2021, being online is not just a trend. Online purchasing options are a necessity, both as a means to combat against limited in-person interactions and adapting to consumer buying trends. The explosive growth for online buying platforms (like Carvana, for example) continues to highlight the need for financial institutions to innovate and diversify their auto lending programs.
For long-term success, financial institutions need to ask these three essential questions to build a competitive auto lending program that helps grow market share, increases yield and provides digital solutions.
1. How are we enabling strategic loan growth?
Some financial institutions saw significant income decline in 2020 and are anticipating increasing delinquencies and charge-offs. In preparation for potential loan losses, it’s important to increase loss reserves by redistributing funds, reevaluating operations costs and identifying alternative investment opportunities. Too often financial institutions neglect deposit growth when liquidity is healthy, only to find themselves turning away potential borrowers or borrowing capital themselves when liquidity is tight. The most effective way to manage liquidity is to build strategies for long-term organic deposit growth through your current and prospective member base.
Developing competency with loan participations and taking the platform approach is one fantastic way to future proof your auto lending program and increase overall efficiencies. A loan participation platform allows the financial institution to make loan participations executable within an online marketplace, facilitating more efficient balance sheet management. When the participation process is standardized across all participants, the platform can automate the due diligence and lender servicing functions of the transaction, thus increasing efficiencies.
2. How are we preparing for an anticipated uptick in collections?
Financial institutions need to be prepared for an increase in loan default risk. For now, repossessions and collections remain normal or below normal as restrictions remain in place and activity is limited or halted. As temporary loan relief measures slowly begin to expire and collections activity returns, loss exposures are expected to increase.
Current relief programs, include:
- Temporary loan relief programs, such as loan forbearance, skipped payment options and waived late fees;
- Paused loan recovery processes, including holds on lender-placed insurance placements, repossessions and collections; and
- Paycheck Protection Program (PPP) loan disbursements to impacted small businesses.
These solutions aim to protect borrowers from unforeseen loan risks, which could better mitigate institutional losses. At the same time, educating members on these solutions presents an opportunity to increase sales penetration, drive revenue, and deepen the relationships between your financial institution and its borrowers.
3. How are we enhancing the borrower experience?
Today’s consumers have a wealth of information and funding options at their fingertips. It’s assumed that consumers will look online to research options and compare offers. To win business from consumers who are actively searching for a lender, having a digital experience is an important way to draw in, educate and capture new loan opportunities. This may include bolstering your online banking experience, introducing mobile banking options, launching online education resources and more to reach borrower auto financing needs.
It’s less likely individuals buying or leasing a car will simply reach out to your local branch to ask about auto lending program opportunities. If you want to attract new borrowers, you need to create a multi-pronged strategy that offers an auto lending program that includes unique, digital benefits that stand up against competitors’ programs.
Strategies to Drive Auto Lending Revenue
With loan portfolio risks on the horizon, it is important for financial institutions to develop new loan revenue channels proactively to offset potential losses. To counter declining lending revenue opportunities, financial institutions need to consider what tools can be strategically placed to deliver frictionless borrower experiences, no matter the product or service being marketed. Artificial intelligence tools are one channel that can help fuel loan conversion by helping reducing call center wait times or instant help via chat tools.
Other considerations for strategic loan growth include:
- Uncovering existing revenue opportunities;
- Expanding loan offerings to serve new markets; and
- Enhancing the borrower experience.
Partnering with the right experts to deliver cutting-edge products and services will help your financial institution continue to thrive and remain at the center of your members’ financial journeys.
Charlie Peterson is SVP of Strategic Initiatives for Allied Solutions, a Carmel, Ind.-based provider of insurance, lending and marketing products to financial institutions.