Given that 90 percent of new car purchases and half of used car purchases are financed, it’s no surprise that the lifestyle changes and digital shift brought on by the pandemic have disrupted auto loans, that age-old corner of the vehicle industry. Whether a car loan comes through a dealer, bank or manufacturer, new J.D. Power research shows that the number of customers doing their credit applications online has kicked into high gear.
“The pandemic accelerated a trend toward digital auto loan origination that has been developing for some time,” Patrick Roosenberg, director of automotive finance intelligence at J.D. Power, said in releasing the J.D. Power 2020 U.S. Consumer Financing Satisfaction Study. “Many buyers who have secured financing digitally had a great experience and won’t go back to the old way of doing things — even when COVID-19 is no longer a factor.”
Consumers and Banks Both Like Online Auto Loans
Consumers are apparently so glad to dump the back-office haggle between dealer and bank that roughly one-third of car buyers are now doing the loan process online, J.D. Power found. And 40 percent of borrowers said they prefer it that way – a sign that the shift might be permanent.
Banks also welcome the speed and confidentiality of online loan origination, as they can enjoy the benefits of scale by being able to receive loan applications at all hours of the day.
Going digital also makes servicing and collecting loans easier. That’s a metric that has been increasingly in focus as COVID-era loan deferments will soon start to expire, potentially causing default rates to soar.
Satyan Merchant, senior vice president and automotive business leader at TransUnion, said that “while the overall percentage of auto accounts leveraging financial accommodation programs has been declining, there were approximately 3.8 million auto accounts in some form of accommodation at the end of September.”
While consumers enrolled in loan deferment programs are typically experiencing the greatest financial hardship, the risk mix of borrowers in such programs has been increasingly shifting toward subprime customers over the last few months, he said. “But as economic stimulus funds evaporate and consumers exit accommodation, future delinquencies may see an impact,” Merchant said.
Trucks Are Hot This Year
While financing, extended warranties and other items added onto a car’s sale are a major revenue source for dealers, the biggest problem they’ve faced this year has been a tight vehicle supply – especially for trucks.
More consumers have sought to buy cars as a result of urban flight or to avoid public transportation. The National Auto Dealers Association (NADA) recently reported that during the first three quarters of 2020, three out of every four vehicles sold were light trucks – a trend that has pushed truck prices to new highs.
At the same time, average manufacturer incentives on new vehicles as a whole are expected to fall from about $5,000 per vehicle in April to less than $4,000 this quarter, NADA said. So even though interest rates have fallen, the net result is that the average monthly payment on a new vehicle rose to $582 as of August – up 3.2 percent year over year.
However, the industry hasn’t made it through the pandemic unscathed. NADA Chief Economist Patrick Manzi wrote in an October assessment of third-quarter sales that “while we have continued to experience a steady recovery for new vehicle demand since the lows of April, vehicle sales have remained depressed compared to 2019 given a variety of factors, including inventory.”
Online Sales Are Also Booming
But not surprisingly, online car sellers are thriving this year. For instance, upstarts like San Francisco-based Shift just reported record results on Thursday (Nov. 12).
“This has been a transformative year for Shift, and we are embarking on our life as a public company with exciting momentum,” Shift Co-CEO Toby Russell said in releasing the results.
Going forward, the company plans to invest in market expansion, branding and marketing strategy, as well as technology-enabled tools to drive efficiency.
As George Arison, Shift’s other co-CEO, put it: “[These] results demonstrate that there is a clear demand for our offerings.”
Paul Hennessy, CEO of online car-selling platform Vroom, recently told Karen Webster that the pandemic is creating demand for autos as consumers find themselves stuck at home, worried about COVID-19 exposure and dealing with retailers and restaurants in new ways.
“We’ve always known that vehicles were an expression and an opportunity of freedom for individuals — the whole idea of concepts like the open road and exploring and things like that,” he said. “But now, the car has actually become a vehicle for safety as well as freedom.”