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Understanding the Consumer Dynamics of Auto Refinance

Joshua Herbert
Blog Post11/12/2020
Credit Trends and Reporting
Understanding the Consumer Dynamics of Auto Refinance

As vehicle sales decline and credit supply tightens, auto lenders are exploring growth options. Lenders have a large untapped opportunity to grow their portfolios: auto refinance. Auto refinance is beneficial for lenders, but it also offers a powerful proposition for consumers. By offering auto refinance options, lenders can build trust with consumers and deliver opportunities to reduce their interest rates or lower their monthly payments.

Auto refinance is appealing for lenders for many reasons. First, 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 from 2013 to the end of Q1 2020. Affordability continued to drive consumer behavior and consumers had more exposure to refinance products than ever before in auto finance. We observed 10% growth year over year in refinanced loans — even with stronger incentives on new vehicles.

We found that 86% of consumers who refinanced their auto loans are “payment shoppers,” decreasing their monthly payment by more than $10. An additional 10% of consumers were loyalty shoppers with a nominal change in payment of $10. A small percentage (4%) of consumers focused on paying down their loans and saw an increase of $10 per month in payment.

We also found that:

  • The average monthly savings from a refinance was $74, but many consumers refinanced to reduce monthly payments by less than $30.
  • Lowering the APR gives consumer savings without modifying the terms. At an average of 2.9% change in APR during refinance, lenders are likely taking advantage of the dealer markups embedded in non-prime auto loans.

Even with lower APRs, payments continue to drive consumer behavior as the average term increased from 4.7 months to 5.4 months.

How lenders can capitalize on the auto refinance opportunity

According to our analysis, credit unions continue to capture the majority of auto refinance — at the expense of independent lenders. Credit unions captured 67% of refinanced trades in 2019 and increased their share to 69% in Q1 2020. Banks, captives and independents have an opportunity to make compelling refinance offers and capture more of this market.

Here are 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 the 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.

With these tips, lenders can build and implement an auto refinance program that helps them grow their portfolio. Next up, we’ll be analyzing how the auto refi market has evolved in the wake of the COVID-19 pandemic.

For more information on how TransUnion can help with auto refinance, fill out the form below.

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