Pre-qualifications surge among auto lenders: here's why

Bank auto lenders are promoting pre-qualification tools in an effort to boost consumer demand, as affordability headwinds continue to deter would-be borrowers from entering the market.

How effective has this strategy been?

• According to Comscore, the number of pre-qualification starts and completes at bank lenders surged drastically between Q1 2023 and Q1 2024, jumping 25% and 53%, respectively.

• Conversion rates also improved over the same period, rising eight percentage points to reach 44%.

• The quarter-over-quarter jump between Q4 2023 and Q1 2024 alone was 15%, suggesting this trend will continue into the rest of the year. However, given that annual pre-qualification volume peaked in Q2 of last year, we may see the rate of growth start to slow in the coming months.

Why is this strategy working?

• Consumers feel uncertain about the current economy, an attitude driven by prolonged inflation, historical interest rates and possibly the upcoming presidential election. When buyers lack confidence in the market they tend to wait for conditions to improve, ignoring opportunities to make a purchase in the hopes of scoring a better deal down the road.

• This low confidence is reflected in how consumers rate their chances of being approved for a loan. In February of this year, the Federal Reserve Bank of New York found that roughly 32% of borrowers expected their auto lender to deny their application, an all-time high.

• Making pre-qualification options easier to access and sharing more information (such as possible APRs) with shoppers at the end of the process encourages their participation in the car market.

Bottom line: While the increase in pre-qualification offers from banks is likely to translate into more sales, dealers should make sure to implement strategies that benefit their own financing operations. Convenience and speed are key to staying competitive in a challenging market.

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