August 26, 2019

How Uber is Changing the Bad Credit Auto Loan Industry and What it Means for you!

Ride-sharing services like Uber along with a number of shifts in socio-economic conditions has made earning in the auto loan market a lot harder, especially from people with bad credit situations. Here are some important things that a financial marketer must know.

Financial institutions need to stay on track and effectively adapt to conditions that come as a result of the changing relationship between Americans and the wheels that they own – or they’ll soon find themselves unready to react with the hot trends as they miss the practical challenges that are right in front of them.

While there are some major forces that disrupt the auto lending market including buy here pay here options, shared vehicles, self-driving technology and dealerships that are online only and even ride-hailing.

A recent report from Raddon Research Insights suggests that these trends will have significant effect on Americans and their cars both in how they are used and how Car financing is done. Financial marketers are thereby advised to make adjustments in their strategy to adapt to these trends that are here to stay for long.

The number of potential auto loan borrowers has decreased because of the many factors that were pointed out in the said report, including losing a job and bad credit scores. There’s a falling pattern in the number of Americans who are buying their own cars compared to the decades that have passed.

One of the factors that are being blamed is the means of manufacturing vehicles. The better the process is, the longer vehicles would last and this affects both the brand new and used vehicle market. There is also a decrease in new drivers being added to the market as most of these younger consumers choose to get their license later in their life. 

The demand is then being pushed later than the usual starting point while some Americans choose to just live their lives without getting a vehicle. The same report has also found that younger drivers are more interested in leasing or paying for slices of usage which is the trend among millennial’s right now. This reduces the position of the usual owner-borrowers.

These huge changes are hard to ignore and Raddon warns that there’s going to be challenges that would come immediately which financial marketers must learn to address. For those who are just starting, the need to shift, the need to shift from the traditional auto lending business to a better and more direct approach is crucial.

It is an effective weapon to find better cross-selling opportunities and fight fintech disruptors. This results in a business that is able to grow a business line within shrinking margins and markets that are historically small. To make it simple, credit unions and even banks will need to squeeze whatever profit they’ll get from auto loans and going after people with bad credit to make even more on them.

The research also criticizes the cross-selling efforts done by some financial marketers both to those who are direct and indirect auto loan clients. These efforts are seen as mediocre in many aspects. At present, there’s one in five institutions that are trying to cross-sell from their relationships with auto loans.

If honesty is among the values that credit unions and banks uphold then there’s a big chance that they’ll concede and admit that their strategies in cross selling are mostly halfhearted and lazy.

Technology Has Not Changed a Lot (Yet)

Presently, there have been a lot of factors that have come to the surface which are seen to have significant impact in the demand for vehicles in the near future but these trends are not yet affecting the pattern in auto purchase than much.

The much-awaited “self-driving cars” seems to make some progress but until now, it is still in the making. According to reports, consumer ownership of self-driving cars is still many years away. One of our sources even says that self-driving cars can potentially decrease auto ownership by as much as 43%. It can achieve so by doing even more work than what is now considered a personal vehicle.  One of the estimates also cited that the need for new vehicles that is produced as a result of the normal wear and tear in autonomous cars can balance the decrease in travel brought by online shopping and telecommuting.

While self-driving cars are still being conceptualized and electric cars are not yet that popular, apps that offer ride-hailing such as Lyft and Uber is bringing much change to the way Americans drive. Among the consumers surveyed by Raddon, 9% were using apps for ride-hailing at least once each week. The report has identified five groups of consumers who use ride-hailing a few times in every month and they are as follow:

  • Credit driven (59%)
  • Millennials  (41%)
  • Dwellers (41%)
  • Upscale consumers (40%)
  • Primary customers of major banks (39%)

Those who belong to the first category as Raddon identified are between 18-34 years old and are earning $50,000 to $125,000 or more. They are also considered “young affluent” while the last is composed of consumers who are customers of any of the six megabanks.

But overall, there were just 14% who used ride-hailing every single day and 20% did so for travelling locally. The other alternatives to ownership include vehicles available via subscription and car-sharing. Services like Airbnb and Getaround are examples of those that represent a small share in the transportation market.

Car sharing and ride-hailing takes rides away from the transportation options that are considered to be alternatives and as well as from the use of personal vehicles. At present, people in urban areas don’t use car-sharing and ride-hailing that much which is why it doesn’t affect car ownership to significant extent. However, as time passes, changes in regulations and technology may also come and it’s not too long until we start experiencing a more noticeable impact.

How Economics of Car Finance Change Within Institutions

But what about vehicle finance? What is its current state today? There are only half of vehicle buyers in America who use financing in their purchase, Raddon says. They also found out that 65% of those who rely on borrowing choose indirect Auto loans. Overall, the pie is divided into 3 parts and they are as follows:

  • Banks (31%)
  • Finance companies owned by manufacturers (24%)
  • Credit unions (13%)

Those who purchase new cars and as well as Millennials are known as buyers who are ‘credit driven’ and they along with the ‘middle market’ or buyers who are aged 35-54 making between $50,000 to $124,999 choose indirect borrowing.

25% of the borrowers get Car loans in a direct manner and 12% of them borrow from banks while 13% obtain it from credit unions. Those who buy used vehicles more commonly known as the ‘Gen X borrowers’ are those who choose direct loans.

And the reason why indirect lending is more popular is because it offers better opportunity for cross-selling additional products and more services. But Raddon says that those 42% choose indirect Car loans because they are either not very familiar with their lender or don’t have any idea at all. The study has found that only 18% of these indirect borrowers remember being offered other financial services by the financial institution they’ve borrowed from. The blame is not on the lack of effort but in the inability to make themselves known to those customers through online and offline marketing channels.

While auto manufacturers and dealers continue to get in touch with their customers through vehicle servicing and repair, those institutions who offer indirect Auto loans have little connection aside from billing.

And if you’re looking for more wrinkles, there are two more that we would like to share. First, those who are prospective buyers intending to borrow look forward to their primary financial institution as the source of financing. Among those who are members of a credit union, 29% expect they will be doing so and this is a source of an optimistic vision, Raddon says.

 

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