Key Trends Shaping Auto Finance in 2024
The auto finance industry is undergoing significant changes, driven by technology, economic pressures, and shifting consumer behaviors, according to Prodigital. Drawing insights from key industry events such as the AFSA Vehicle Finance Conference, AFS East, and reports from leading sources like McKinsey, Auto Finance News, Experian, and Moody’s, we highlight seven critical trends shaping auto finance today.
1. The Rise of Fintech and Digital Transformation
Fintech is revolutionizing auto finance across various aspects of the loan lifecycle, including:
- AI-driven loan approvals and alternative data usage
- Digital loan processing
- Enhanced purchase transparency
- Streamlined dealer connections
- Improved fraud prevention and servicing
The industry is embracing these advancements to enhance efficiency and customer experience, especially in challenging financial times.
2. Subprime Market Fluctuations
Auto loan delinquencies were anticipated, and their rise is now evident. Industry experts, as discussed in a recent webinar on auto finance threats, note that subprime borrowers are often reliable due to their dependence on vehicles for daily life. However, major subprime lenders like American Car Center and U.S. Auto Sales have closed, forcing dealers to seek new lending partners. According to Auto Finance News, these developments continue to reshape the subprime lending landscape.
3. Rising Prices, Interest Rates, and Loan Payments
Experian’s Q1 2023 State of the Automotive Finance Market Report states that the average new car payment has reached $725. Additionally, Edmunds reports that nearly 15% of drivers who financed a car late last year are paying over $1,000 monthly. High interest rates are keeping payments elevated, making it harder for non-prime borrowers to upgrade vehicles, despite falling used car prices.
4. Repossession Trends
Although delinquencies are increasing, non-prime borrowers are making significant efforts to avoid repossession. Losing a vehicle can mean losing a job, particularly in areas without reliable public transportation. With federal student loan repayments resuming, industry players are preparing for potential impacts on auto loan delinquency rates.
5. Longer Loan Terms as a Solution
To help borrowers manage payments, auto lenders are extending loan terms. Reuters reports that new car loans spanning 73-84 months accounted for 34.4% of the market in 2022, up from 28.6% in 2018. While this approach provides short-term relief, it also increases the risk of borrowers being underwater on their loans, a trend likely to persist amid high interest rates.
6. Enhanced Agent Coaching and Training
Auto finance leaders are grappling with training and retaining loan servicing agents. As voiced at multiple industry conferences, common challenges include ensuring agents communicate effectively and follow compliance guidelines. AI-driven solutions such as real-time agent assistance, automated call notes, and AI-based call scoring are becoming essential tools for improving efficiency and agent performance. Additionally, creative incentives—like Girl Scout cookies, as highlighted in a recent webinar—can play a surprising role in motivation.
7. Delinquencies on the Rise
Moody’s reports that auto loan delinquencies reached 7.3% in Q2 2023, surpassing pre-COVID levels. CNN further cites Moody’s warning that delinquencies could peak between 9% and 10% in 2024, compared to 7% pre-pandemic. With both auto and credit card payments under strain, the industry is bracing for continued financial stress among consumers.
Auto finance professionals must stay vigilant in an evolving landscape influenced by fintech innovations, shifting market dynamics, and economic pressures. By leveraging technology, adapting repayment structures, and proactively addressing delinquencies, industry players can navigate these trends effectively.