Trends in the automotive financing industry

The outlook for U.S automotive financing industry in 2014 is positive. But that doesn’t answer all the open questions before the auto lending industry. In this post, we will try...

Snehal Fulzele 28th January 2014

Car-Loans-5The outlook for U.S automotive financing industry in 2014 is positive. But that doesn’t answer all the open questions before the auto lending industry. In this post, we will try to look closely at some of the recent trends and the open questions before the industry, which must be resolved to achieve sustainable growth in the future:

Regulatory Environment

Last year the Consumer Financial Protection Bureau (CFPB) made it clear that it will provide transparency in the auto financing industry. That only means one thing for the auto lenders – stricter regulatory & compliance requirements. One of the immediate changes the industry might be staring at is regulations to make the “dealer reserve” charges more transparent. CFPB alleges that the dealer reserve is leading to exorbitant markups on auto loans. This may have an impact on the loan origination process.

Borrowers are preferring longer loan terms

More borrowers are opting for longer loan tenures. According to Experian, long term auto loans (in the range of 73-84 months) have jumped by more than 25% in the past year and constitute about 20% of the total new-car lending. The next category of 61-72 months accounts for more than 40% of the total new-car loans. The implication of this trend is that ultimately the borrower is going to end up owing more than the car’s worth for a longer time, which increases the risk for the lenders as well.

Increasing age of cars on the roads

A recent study from Polk indicated that the age of the cars on the road is continuing to rise. In 2013, the average age of the car on the American roads was 11.4 years, an increase of over 18% from average age of 9.6 years in 2003. Several factors including the recession, increasing gas prices as well as the improving quality in the cars can be attributed to this trend.

For the auto-finance industry this means two things – fewer people are expected to look for new cars in the future and the trade-in value of the buyer’s old car is going to be insignificant. This may make it difficult for the new car buyer to work the finances within his budget.

Will alternative financing make way into auto-lending?

Prosper already offers peer-to-peer (P2P) auto-loans. Will such new business models and access to such alternative financing have an impact on the more traditional auto-lenders? While the impact of such new business models is yet to be seen in the auto-financing world, it may not be too late before we witness it, especially if the traditional auto-lenders don’t relax the restrictions on the loans.



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