Now more lenders appear to be taking an integrated view of dealer coverage across the full suite of dealer offerings, supported by a comprehensive dealer-level scorecard. Historically, some captive financing units and banks have taken a very siloed approach to distributing these products. 4 Floor plan financing is a plan in which dealers that finance their inventory through their automobile company receive cash rewards. Their products include consumer auto finance, warranty and payment-protection products (including white-labeled offers), and floor plan and commercial financing programs. Captive lenders and banks distribute multiple financing and insurance products to dealerships. This shorter loan period offers protection against interest rate risk, which has increased with inflation.Ĭonsumer financing of vehicles typically involves indirect financing through dealership networks, which accounts for 70 to 80 percent of total volume. 3 Warren Clarke, “What’s the average car loan length?,” Credit Karma, March 2, 2022.
(Despite these conditions, the cushions that have protected this asset class may have begun to diminish.) Another draw for lenders is the average loan length of the asset class-roughly six years according to recent research, which is significantly shorter than the average mortgage. Delinquencies have remained near all-time lows despite lingering unemployment, rising vehicle prices, and relatively higher inflation, in part because borrowers have leaned on financial-hardship programs that let them postpone loan payments. Particularly in the face of a potential recession, lenders may appreciate auto financing’s consistently low delinquencies (less than 3.5 percent) over the past two decades, including during the subprime debt crisis (Exhibit 4). The rise in consumer demand is not the only attraction for lenders with portfolios of consumer asset classes. Regional banks, online auto retailers (for example, Carvana and Vroom), and a number of fintechs (including AutoFi, AUTOPAY, and Caribou Financial) are entering or have recently entered the space. The value chain for auto purchase and ownership has transformed over the past few years, opening up new opportunities for financial services. Meanwhile, high interest rates and limited housing inventory are presenting challenges to growth in other consumer asset classes, such as mortgages and unsecured lending. In 2021, demand spiked 20 percent, accompanied by a corresponding increase in used-vehicle prices (Exhibit 1). US auto loan origination grew just 2 percent a year from 2016 to 2020, with indirect financing through dealership networks accounting for around three-quarters of total consumer financing volume. Also, in the current uncertain economic environment, they will need to heighten their focus on delinquency rates. They should consider taking advantage of market tailwinds to increase origination and evaluating initiatives to improve profitability and establish greater dealer stickiness. Incumbents in the auto financing segment will continue to play a key role if they prepare for disruption. A diverse and expanding set of lenders-large banks, regional banks, online retailers, and fintechs-are considering moves into this asset class. In the last 18 months, the industry has seen a sharp increase in demand. This period of relative stability may be about to end. Auto financing, by contrast, has experienced relatively little disruption over the past decade. In the mortgage market, low-cost digital attackers have been gaining significant share, and retail payments have seen the emergence of buy-now, pay-later players. Dramatic changes have marked the US financial services industry over the last five to seven years.
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