A series of interviews with innovators operating at the intersection of consumer behavior trends and business transformation: Todd Denbo, SVP and GM of Auto at LendingClub.
Bruce Rogers: Purchases are down this year and the mix of vehicles people want has shifted to trucks and SUVs. What are the other long-term trends for the auto business?
Todd Denbo: Alongside SUVs and trucks, crossover utility vehicles (CUVs) have risen in popularity — even outselling all car segments combined — and this trend is likely not going to slow down anytime soon. Because of their popularity, dealerships will likely stock their lots with more CUV models and offer more incentives and discounts to lease or purchase the models.
Another trend to point out is that new vehicle sales are declining, but the used vehicle market has grown drastically. In 2018, 40.2 million used vehicles were sold in the U.S.; In 2019, analysts predict used vehicle sales could reach approximately 41 million. With rising interest rates (about 1% point over the past year) pre-owned vehicle sales will likely continue to rise as more shoppers seek affordable alternatives to the pricey SUVs, CUVs, and trucks they’d like to purchase. This trend of finding alternative ways to purchase pricier cars has also led to an increase in subprime borrowers seeking and being approved for auto loans. We’ll also see longer terms (as high as 84 months) for auto loans as the cost of cars continues to climb and down payments are shrinking.
Rogers: What should consumers know about auto financing?
Denbo: As with many other types of loans, consumers can refinance auto loans. Similar to the reasons that homeowners refinance their mortgage loans, most people who refinance their auto loan are looking for a lower monthly payment and/or better interest rate. Besides credit and income related factors, loan-to-value (LTV), mileage, and vehicle age are typically the most important factors in determining one’s ability to refinance their current auto loan. Typically, the lower the loan-to-value (LTV) ratio the more likely it is that your car will be eligible to refinance, and it may even qualify you for a lower interest rate.
You can reduce your LTV by making a sizable down payment at the time you purchase the car or a lump sum payment at any point during your repayment term. Most lenders who offer auto refinancing won’t lend if the LTV is greater than 150% or 160%. That may seem like a high enough ratio to meet, but cars can lose as much as 20% of their value in the first year, and about 10% each year thereafter – another reason to refinance your auto loan as soon as possible, while the value is still high.
Your PTI (payment-to-income) ratio is too high, ask the refinance lender if extending your loan term by 6 to 12 months would reduce your monthly payment amount enough to qualify. If you were declined due to poor credit, consider reapplying after 6 consecutive months of making on-time payments on all your accounts. Oftentimes even six months is enough time to improve your credit score enough to qualify.
Rogers: What are the economic implications of late payments?
Denbo: According to the Federal Reserve Bank of New York, 2018 marked the highest level of annual auto loan origination since such data has been tracked, with $584 billion in new auto loans and leases appearing on credit reports, up from $569 billion in 2017. On the flip side, the NY Fed also reported a record number of seven million Americans 90 or more days behind on their auto loan payments.
Although delinquency rates have been rising the last few years in the auto industry, they appear to have stabilized as of late, and they remain moderate. The severe delinquency rate (share of balances 60+ Days Past Due) in October 2018 was 1.04%, equal to the rate in October of 2017. The peak monthly write-off occurred in May of 2009 at 46.4 basis points.
What is shocking is the percentage of people who don’t even know that refinancing their auto loan is an option. In fact, a recent Harris Poll found that less than half (only 47%) of Americans were aware that refinancing their auto loan was an option. Most of us are familiar with refinancing a home mortgage, but significantly fewer consumers are aware that they can refinance their auto loan to take advantage of a lower interest rate. Even those with less-than-perfect credit can save thousands on their car loan by refinancing. And in a world where more than 40% of Americans don’t have enough savings to cover an unforeseen $400+ emergency, this should be one of the go-to solutions for many more Americans.
Rogers: Why did LendingClub decide to launch an auto refinancing platform?
Denbo: Tens of millions of Americans borrow over half a trillion dollars every year to buy cars, but the current practices and processes of the auto lending industry offer consumers limited options and a lack of transparency. And the incentives of dealers and auto finance companies are often misaligned with consumers – e.g., the more consumers pay to finance a car the more dealers make. This has created a huge gap between the rates consumers pay and the rates they might otherwise qualify for, unnecessarily driving up debt burdens.
We entered the auto loan refinancing space quite simply because we knew we could deliver meaningful value for our customers and our investors. The majority of people coming to us are dealing with APRs above 17% — and many even over 21% — and they have a substantial length of time remaining on their term. We also recognized that auto financing was an industry where we could disrupt age-old practices and differentiate the customer experience – streamlining the loan process and eliminating friction points that have historically inhibited borrowers’ ability to easily refinance their high-rate auto loan.