During a roundtable discussion at the Non-Prime Auto Finance Conference in Irving, Texas, lenders discussed industry trends, including how affordability and consumers’ ability to pay are prompting some lenders to adjust their underwriting strategies.
Betty Jotanovic (President of Auto Relationships at Santander Consumer USA), Russell Warden (CEO of SameDay Auto Finance), and Landon Starr (CEO of Arivo Acceptance) took part in the discussion session “How Leaders Are Guiding the Industry Forward.”
Stresses of affordability: Affordability was a central theme of the discussion, especially with interest rates remaining high.
“We’re looking at our costs of funds increasing, with interest rates increasing because of a lot of the macroeconomic headwinds, there’s some very real questions that we have to ask ourselves,” Starr said. “In absorbing all of the costs with interest rates, you eventually get to the point where you can no longer lend to as many consumers because we’re pricing it out of the affordability spectrum for some of the consumers.”
As a smaller subprime lender, Warden noted the economics have forced their company to make changes.
The floor for FICO scores has increased by 40 points, along with an increase in their minimum incomes.
“Unfortunately, we can’t lend to the same kind of borrowers we were lending before. We had to sort of hold our risk limits and change what our averages were,” Warden stated.
Representing the largest lender on the stage, Jotanovic noted the importance of underwriting staying consistent with policy and making sure “they are putting the customer in the right car.”
“The challenge is if you’re solely focused on payment and trying to create affordability, putting a customer in a car they can’t afford by simply extending a term, you’re creating something that is not sustainable,” Jotanovic said. “Extended terms may seem attractive initially because the payment’s lower, but ultimately, you’re creating a loan that may not withstand the test of time.”
Changing consumer habits: Another impact of higher prices and interest rates is a shift in consumer shopping behavior and in how ready they are to purchase a vehicle.
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Backing this, Jotanovic pointed to Santander's survey results among middle-income Americans, showing that 49% of respondents said they are delaying their purchase.
“That tells me either more Americans are on the sidelines or have actually made the purchase,” Jotanovic said.
On the flip side, 88% of respondents said they were considering purchasing a used car.
Consumers are also increasingly struggling with insurance and repair costs, Warden said.
Big picture: Lenders also noted the increasing use of AI for some tasks, especially back-office repetitive tasks, which is just one more sign that the lending environment dealers are operating in today looks nothing like it did even a few years ago, and in smaller ways, could look completely different in just a few weeks from now.
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