State of the Subprime Auto Lending Market

Working in the subprime auto lending market, the tendency is to focus on the threats and opportunities that are directly in front of us. We zone in on our specific subprime auto portfolios and do our best to obtain the highest risk-adjusted returns. Ultimately, it is easy to get stuck in the weeds rather than stepping back and taking a 10,000-foot view of what is really going on.

Because of this, it is worth taking the time to pause and take a broader look and analyze today’s subprime auto lending market. While you may intuitively have a sense of where the market is, taking a look at the data itself may lead to some unexpected insights. In other words, by digging into the numbers of the current subprime auto lending market, you can better anticipate near and long-term trends that will undoubtedly affect your organization.

Today’s Subprime Auto Lending Market

To understand today’s subprime auto lending market, it helps to start from an extremely broad view and work our way down.

The U.S. auto industry as a whole has bounced back nicely since the turmoil from the Great Recession, but in recent years, the industry has been treading water. In 2018, for instance, U.S. carmakers sold 17.3 million new units, which was only a 0.6 percent increase from the prior year. Projections for 2019 aren’t the rosiest. Many industry observers are predicting that there will be fewer new vehicles sold in the United States this year, with some predicting a 1.8 to even a 4 percent decline. While the aftermarket is more promising, macroeconomic concerns—including the potential for additional tariffs or a prolonged U.S.-China trade war—may create significant headwinds.

As for the auto lending market itself, auto-loan originations continue to increase. In fact, in 2018, the auto lending industry had the most originations in terms of dollars ($584 billion) in the 19-year history of data for auto loan originations. Subprime lending covers around 21 percent of total auto-loan originations, which comes out to approximately $122.64 billion annually. Because this is such a large number, auto lending experts were experiencing heartburn earlier this year due to news of subprime auto delinquencies reaching levels near the worst days of the Great Recession. While more dovish interest rate policy from the U.S. Federal Reserve may mitigate some near-term stress, these underlying trends are certainly worth monitoring.

There are also some interesting trends in terms of retention of these subprime auto borrowers. According to  ________, the average retention rate in the subprime auto lending industry is ____. A great retention rate is ______. That’s an overall loss of _____ per year, with each lender losing approximately ____ percent of repeat business from current borrowers.

While these retention numbers may appear discouraging, auto lenders aren’t out of luck. Aclaró is in the business of delivering data transparency and personalized insights to its auto lending clients. As part of this overarching mission, the company leverages cutting-edge technology to help lenders generate consistent business from their current borrowers. Aclaró’s advanced software can even offer lower rates to borrowers who have a machine-predicted low propensity of default. This data is not found in a traditional credit check, which allows Aclaró partners to offer even more attractive rates to their clients.

Ultimately, with Aclaró, you can increase your retention rate by approximately 7 percent per year. This equals about $___. It goes without saying, but this can make a serious impact on your organization’s financial health. It can reduce your customer acquisition costs and allow you to retain more earnings within the organization itself.

Acknowledging the Present and Anticipating the Future

As you undoubtedly recognize, the data around the auto market and subprime auto lending market is mixed. Americans continue to purchase vehicles, yet obtaining financing for those vehicles may become more challenging.

Because of this, one of the best ways to ride out market turbulence is to increase your retention rate through a tool like Aclaró. Through Aclaró’s cutting-edge software, your organization can better leverage the relationships you already have with borrowers to increase your bottom line. If you would like to learn more about how Aclaró can help you, click here.

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