Understanding the Consumer Dynamics of Auto Refinance

Vehicle sales will continue to decline as inventory shortages impact retail and wholesale supply chains. As such, auto lenders are exploring growth options and even traditionally non-auto lenders are entering a largely untapped space — auto refinance. While beneficial to lenders, auto refinance continues to be a powerful proposition for consumers as well. It provides them an opportunity to reduce their interest rates and/or monthly payments — which in turn promotes trust and loyalty.

In addition to the above, auto refinance is appealing for other reasons. For instance, most auto delinquency occurs within the first few months of purchase, which means auto refinance loans typically have a better risk profile and performance than purchase auto loans. Additionally, direct-to-consumer loans generally perform better than dealer-originated loans. Lenders also eliminate the challenges associated with identifying or predicting consumers in the market for an auto loan.

Analyzing trends in the auto refinance market

To understand the market opportunity, we analyzed auto refinance originations in 2018 through 2020. Affordability continued to drive the behavior of consumers — who had more exposure to auto refinance products than ever before. Even so, in a survey TransUnion conducted, we found awareness of auto refinancing lags greatly behind that of mortgage.

Payment shoppers still lead the way as far as motivation for refinance, although there was an increase in shoppers who either increased or didn’t change payment amounts. In previous studies, we found almost 85% of shoppers were motivated by a reduction in payment, but in 2020, that number dropped to 75%.

We also found in 2020:

• The average monthly savings from a refinance was $55, and 25% of refinances resulted in savings greater than $100
• APR average reduction was 3%, with 20% of refinances resulting in an average reduction of 5% or more

How lenders can capitalize on the auto refinance opportunity

We sized the refinance market and estimated 26 of 73 million consumers are in a position to be highly motivated to refinance their loans. With shortages of inventory, there’s also a strong opportunity to support lease buy outs — with over 4 million leases expiring in the next two years.

Looking at 2021, we also see:

• 80% of consumers have positive equity positions in their vehicles (excluding high mileage depreciation)
• 8 million consumers have APRs of 10% or more

Below you’ll find our recommended best practices for auto refinance.

1. Engage consumers within the first two years of their purchase.
2. Make a more compelling offer with payment-based savings versus APR savings.
3. Look for opportunities with non-prime consumers who typically have higher rates and more markup on their loans than top-tier prime consumers.
4. Find the right audience using sophisticated marketing solutions that include those with a high propensity and correct loan-to-value.
5. Increase your conversions by reducing friction in online forms — time and complexity could negatively impact acceptance rates.
6. Embrace solutions that prefill information, such as application and VIN, further reducing friction.
7. Use more data and advanced solutions to automate conversions, reducing operational costs.

These tips can help lenders build and implement an auto refinance program that better enables portfolio growth during an expected shortage of vehicle sales.

To learn more about the study and how TransUnion can help with auto refinance, read our quick guide