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Maintaining Loan Volumes Amid Rising Prices: A Guide for Auto Lenders

Will Ely

1. March 2023

  • Pricing
  • Customer Centricity

How Auto Lenders Can Maintain Loan Volumes Amid Rising Interest Rates  

It’s a tough time to be an auto lender. Not only is the total auto loan amount financed decreasing but in the third quarter of 2022, loan originations fell to their lowest levels since 2013. Leasing is down, too–from 24.7% of vehicles in Q4 2021 to 20.9% in Q4 2022. 

Facing these challenging trends, the question remains: How can lenders maintain volume without pricing too low to threaten profitability and increase delinquencies? 

It may be especially difficult as interest rates continue to climb. According to Cox Automotive, average interest rates increased from 5.1% in December 2021 to 8.02% in December 2022. As recently as January 2023, APR on new car rates averaged 6.92%, while used cars were 10.57%. These are still significantly higher than where they stood in August of 2022 (5.7% and 9.0%, respectively).   

Other trends and factors will also present new challenges for auto loan originators. Examples of this include inflation, which increases average loan payment amounts, low inventories, and even new expectations from customers looking for fast, seamless credit and loan approval processes.  

Such a climate may give some auto loan lenders pause, to the point of rethinking their past aggressive strategies to avoid pricing loans incorrectly. A recent article from The Financial Brand noted the high-profile case of Capital One, which has pulled back on auto lending in reaction to new industry challenges as well as more aggressive pricing from competitors, which only make auto loans less profitable.  

How Can Lenders Address These Challenges? 

The auto lending world hasn’t always been so chaotic. In the past, stable treasury rates, lower car prices, and ample inventory meant that lenders could often wait weeks, even months before making pricing updates. In those types of conditions, there was no downside: lenders didn’t sacrifice overall volume or profits and could still remain competitive in the market.  

Unfortunately, in 2023, this is no longer the case.  

What can auto lenders and loan originators do to react, pivot, and stay a step ahead? One answer is increasing the overall sophistication and speed of their pricing strategies. Lenders can no longer use old ways of thinking and acting about pricing. Instead, they must increase their overall agility and take advantage of powerful analytics and other innovations such as machine learning and artificial intelligence to update models, offer the most compelling prices, and get them to market extremely quickly–even making changes on a daily basis. 

If they can’t make these changes and continue to attempt to use basic pricing modeling processes, they face real risks on both sides of the equation: either seeing a decrease in their overall loan volumes or loading up their books with unprofitable loans.  

Maintain the Balance Between Volume, Profitability, and Overall Competitiveness 

To put a positive spin on it, such a challenging industry climate does present an opportunity for auto lenders who can become more nimble and accelerate their pricing processes. Even better, if these lenders can get even faster, they stand a real chance of pulling away from competitors who may still be mired in traditional approaches and who must now take urgent steps in their attempt to keep up. 

We suggest the following strategies and best practices to reshape pricing strategies and gain a first-mover advantage: 

  • Quickly and proactively assess how trends and changes in the market could potentially affect the lender’s total portfolio. This can include shifting treasury rates, aggressive competitors’ pricing, delinquency rates, car prices, and other economic metrics and should include the latest data possible. Using powerful data analytics and other modeling solutions further helps shape predictions about the road ahead.  

  • Develop a detailed, intelligent plan and response. In terms of pricing, this should include a highly agile pricing function (driven by the latest AI-powered pricing) that combines analytics, go-to-market strategy planning, and competitive intelligence.  

  • Turn to technology. The best bank pricing software solutions today now offer powerful automation capabilities – critical to eliminate excessive internal handoffs and accelerate time to market – as well as ML and AI capabilities that use self-learning cycles to improve pricing strategies and results over time.  

  • “That which is measured, improves. That which is measured and reported improves exponentially.” -Karl Pearson. In addition to developing better pricing strategies and offers and getting them to market faster, auto lenders should also monitor pricing performance in real time. Ideas to consider here include real-time price deployment, dynamic A/B testing capabilities, and ongoing monitoring in order to make the best decisions possible. 

While 2023 may still present a few bumps in the road for auto loan originators looking to keep volumes high, it can also offer new opportunities. Lenders who are able to move away from cumbersome, time-consuming pricing approaches and who can embrace new technologies for faster, more-effective pricing stand to gain a significant advantage over those who can’t. 

See how Earnix is already changing the auto lending industry – and enabling our customers to achieve their specific goals.  

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Will Ely