Competition has increased, especially from credit unions. Credit unions now account for almost two-thirds of refinanced motor vehicle loans, and that increase has come at the expense of independents and captives. Delinquency rates are up. Waning demand is another factor, as years of growth have satisfied any pent-up desire for vehicles. In this dynamic landscape, lenders must explore alternative growth options.
Why consumers refinance
First, it’s critical to understand why consumers refinance their auto loans. Those refinancing fall into several categories, per TransUnion. Payment shoppers want to take advantage of lower interest rates or consolidate loans. They want to reduce their APR or extend the loan terms. Refinancing can also reduce or eradicate the dealer markup. Payment shoppers are usually prime, near prime, or subprime. They tend to refinance in either fewer than 30 days after originating the loan or within three to four months of the origination.
Loyalty shoppers refinance to take advantage of loyalty programs, but the structure of the deal doesn’t change. These are the individuals likely to refinance within days of acquiring the vehicle, but most auto refinancing takes place within one to four months of the original financing. The loyalty shopper is generally prime plus or super prime.
The paydown shopper wants to pay off the loan as soon as possible and reduce the terms. They are similar to loyalty shoppers in that they are usually prime plus or super prime. Paydown shoppers resemble payment shoppers in that they tend to either refinance fairly soon or wait three to four months. Of all categories, paydown shoppers have the highest delinquency rate, even though their objective is paying off the loan quickly.
The payment shopper makes up the overwhelming majority of refinancers, approximately 70 percent. Loyalty shoppers comprise about 17 percent, with payment shoppers accounting for just 13 percent. Loyalty shoppers’ loans tend to perform better than other types.
Most consumers save between $10 and $30 per month after refinancing. Term extensions average 4.7 months, with the average rate reduction 2.4 percent. When it comes to rate reductions, most consumers are willing to accept small amounts.
Refinance market uncertainty
There is a great deal of uncertainty regarding the refinance market in the next few years. Much depends on the economy, which could continue growing or head into a recession. Interest rates drive refinancing, and if interest rates don’t drop, less refinancing will occur. Delinquencies have risen, resulting in a flight to safety by lenders and limited financing opportunities for sub-prime borrowers. Lenders are primarily focusing on super prime and prime plus borrowers.
A lack of information regarding the refinance market affects the industry. Many people simply do not realize they can refinance their motor vehicle loans. While 62 percent of auto lenders offer refinancing, less than half of buyers know refinancing is an option. Only 12 percent of car buyers have ever refinanced an auto loan.
Lenders need to up their motor vehicle refinancing marketing and educational campaigns. Websites should feature information about refinancing, rather than relegate it to less frequently visited portions of the site or, even worse, not mention refinancing at all.
Refinancing by lender type
As noted, credit unions now perform the lion’s share of refinancing. While credit unions formerly focused on the prime segment of the market, they are increasingly originating non-prime refinances. However, bank customers are more likely to refinance, and do so more quickly. Bank refinancing enjoys a 20-day lead over credit union refinancing.
Major players and the refinance market
How much attention the major lenders — such as Bank of America and Chase — pay to the refinance market determines its future. If these big players decide to focus on this market, the industry grows. If they don’t make the refinance market a priority, expect single-digit growth over the next several years.
Alternative growth options for lenders
More lenders are exploring alternative growth options, and that includes motor vehicle refinancing. There are many benefits to refinancing, including the fact that most delinquencies occur within just a few months. That means the consumers who make payments regularly, even for six months or less, are usually low-risk borrowers. Overall, direct loans to consumers outperform loans from dealers. The potential size of the motor vehicle refinancing market is huge, with possible growth of as much as 21 percent if the major players decide to prioritize auto refinancing. Each year, approximately $400 billion in auto loans are originated, contributing to a total of a $1 trillion in such loans. Refinancing could capture up to $20 billion of that annual market.
Optimism for growth
Summer is the top season for car purchases, and it is also the best season for refinancing. According to TransUnion, auto sales spike an average of 5.5 percent in the year’s third quarter. That’s also when many buyers refinance their car loans, even if the loans originated just a few days earlier.
Many customers look for deals on current models before next year’s vehicles appear in the fall. For 2019, the prospect of additional tariffs on vehicles made by foreign companies may also drive sales. If the purchaser has to pay a relatively high interest rate on the original loan, they may find refinancing shortly thereafter lowers the rate or extends the term. In this environment, there’s certainly optimism for growth, but optimal growth won’t occur until issues such as disseminating consumer information and online refinancing are resolved.
Enabling lenders to refinance efficiently
Lien Solutions is focused on lenders. We offer accurate, efficient, and cost-effective refinance solutions to facilitate titling with up-to-date expertise for all 50 states. It is important for lenders to accurately and quickly remove the original lien holder and add a new lien holder to the title, change ownership, or perform title and registration in case of a lease buyout. We understand the important aspects of refinance titling challenges. Download our latest ebook on motor vehicle retitling.