Understand the BPO Transition Framework and How Auto Lenders Can Make It Easier

The outlook for automotive financing in the United States for 2022 looks strong. As the world moves beyond COVID, supply chain issues that led to semiconductor shortages in the auto industry are easing. These shortages are unlikely to fully resolve until at least early 2023. However, demand for motor vehicles has undoubtedly recovered from a low point in 2020.  

Though rates ticked up in February 2022 to 3.94 percent on five-year automotive loans, they’re still well below their peak of almost 5 percent in December 2018, though these are likely to go up should the Federal Reserve adjust rates. This bodes well for auto sales in the near future, despite current events causing rising prices at the pump that will likely find consumers looking for loans for more economical, or even electric, vehicles.  Additionally, this pent-up demand, along with lower rates brought on by the pandemic, has increased the need for lenders to partner with financial technology developers to handle auto loan servicing and origination. For companies involved in auto lending, providing streamlined services that enable consumers to access financing more easily is key. 

Technology allows lenders to simplify the process for borrowers, saving consumers the hassle of going through time consuming processes. The growth of innovative software platforms also aids lenders in determining whether borrowers qualify for a loan and what risk specific customers present. When technology is applied to an end-to-end loan service, automotive financing is easier for lenders and borrowers.   

When consumers need to obtain financing to purchase a motor vehicle, it’s simpler and more economical to use a single provider, especially for an end-to-end loan. The services automotive lending providers offer customers will affect how satisfied customers are with their experience, which plays a role in whether they recommend the service to others or even return themselves. 

Using an end-to-end loan service for automotive financing easily includes third-party information that helps lenders offer the most appropriate rates and services throughout the life of the lease or loan. 

Advantages of end-to-end automotive loan servicing include: 

• Allows lenders greater efficiency by using products and services that look the same, feel the same, and have the same foundation.
• Let’s lenders make changes in their lending practices and processes and move with market demand.
• Enables delivery of complex financial services from start to finish. 
• Optimizes the lending process by including third parties and sharing the information throughout the lease or loan lifecycle. 

These advantages enable a seamless business operation flow from internal to external teams of experts. Utilizing end-to-end solutions provided by a single provider rather than an ad hoc assortment of contributors optimizes the process and encourages a more customer-oriented experience. 

The origination cycle can, in many ways, be compared to dating, a sort of club where lenders and borrowers meet up to consider whether they want to be in a relationship. And like a dating app, the whole origination cycle becomes easier and quicker when using a technology-based end-to-end loan service. Automotive loans benefit from such technological innovations that make both the application process easier for borrowers and the decision to loan the money safer for lenders. 

Collecting Data

Lenders must first collect data so that they understand the level of risk to which they’re exposing themselves. This can occur before or after a loan applicant walks into a dealership, inquires about credit approval in person, or applies online for a loan. This typically begins with the potential borrower submitting identification documents with an application form. As with personal relationships, some lenders don’t want to start a relationship with someone who’s unlikely to pay off a loan. Other lenders are willing to take greater risk, but need more information in order to best understand what that risk is.

Data collected generally includes:

• Collateral provided, which in this case refers to the vehicle purchased, in the form of a title. 
• Credit history regarding payments on credit cards and other loans, bankruptcies, delinquent accounts, etc. 
• Income that considers cash inflow from pay, investments and other sources, along with the ratio of debt-to-income—for commercial auto loans, this would also look at cash flow over time and projections for the business.

The primary objective for this data is to either reduce the chance of default to as near zero as possible or at least understand the risk and set an appropriate rate.

Risk Assessment

Lenders use set procedures to evaluate the risk of providing credit, setting criteria for age, income, previous credit history, etc. Tools that make this task easier help lenders mitigate risk, such as integrating analytics software into the loan origination process to provide insights into applicant data.  

Submitting Documents

For auto loans, using automated online resources to accept applications and  manage documents will ease the process for borrowers. This would include documents that demonstrate proof of identity, insurance, residence and salary 

Credit Check

Credit scores help lenders establish whether a borrower fits their lending criteria. The most modern originations and servicing systems provide access to data from at least the three largest organizations that collect credit information: Equifax, Experian, and TransUnion. Each uses slightly different algorithms to establish an applicant’s relationship with previous credit providers.

Underwriting Loans

This is the point at which credit providers review all collected data to determine whether an applicant offers an acceptable risk. This process is made more efficient through the use of technology, which allows lenders to evaluate creditworthiness quickly. By using an integrated end-to-end loan service, automotive lenders can better evaluate risk and return a response to the borrower in seconds 

With analytics integrated into the underwriting process, auto lenders can:

• Better understand collected lending data.
• Develop additional analytic tools without the need for coding or other technical skills.
• Evaluate and report back to applicants quickly to minimize inefficiency while maximizing risk analysis. 

Automated technology has reduced the time necessary to determine creditworthiness while making the process more secure. 

Credit Decision

After the underwriting process, a decision is made on whether to lend to the applicant or not. The loan is either approved, denied, or sent back for additional information. With an end-to-end loan, service for automotive applicants goes more smoothly when parameters can be adjusted automatically. This allows lenders to adjust their decisions based on changes to down payments, interest rates, or total loan amounts.

Loan Agreement

The final loan agreement establishes a contract between the lender and borrower, specifically laying out details of the loan. It will include how and when payments will be made, along with details such as interest rates, amount, and the time period over which payments are made. Contracts these days are more likely to require e-signatures rather than pen on paper, which can reduce the time it takes to originate a loan.  

Automated Payment

Many businesses use automated payments to help facilitate regular fund transfers. Lenders are no exception, as they can then count on regular payments on specified dates. But when it comes to an end-to-end loan service, automotive borrowers also benefit. Additionally, lenders are turning to software-as-a-service (SaaS) providers to enhance their capabilities.  

Many software-as-a-service (SaaS) providers enable borrowers to: 

• Easily access account information. 
• Update contact information. 
• Put automated payments in place.
• Confirm whether payments were made. 
• Review history of payments.
• Download statements and account summaries.
• View current loan amount.
• Request customer service contact the borrower.

Though this can be done over the telephone, online forms and communications are generally more convenient.

The process behind obtaining finance for a vehicle can be frustrating for consumers, dealers, and lenders alike. Simplifying and streamlining the process with fintech makes the whole process easier. As in other industries, automation is becoming an essential element of doing business. Increasingly, auto lenders utilize online forms and e-signatures when someone applies for an end-to-end loan. Technology allows lenders to provide better service to lenders while also strengthening their ability to mitigate risk. 

These new technologies enable lenders to:

• Automatically or provisionally approve applications based on well-defined credit policies.
• Describe, apply, and change rules easily as needed. 
• Develop and utilize complex algorithms as part of the decision-making process. 
• Implement decision-based rulemaking throughout the lending process. 
• Maintain historical records automatically for compliance purposes. 

Cloud-based software platforms with analytics capabilities specifically developed for lenders are quickly becoming the norm. Using algorithms to calculate risk more accurately reduces the chance of human error. SaaS companies, too, are becoming more common in the auto loan industry, helping lenders customize software to meet specific needs, making the whole loan application process easier, quicker, and more efficient.