The Transunion Q4 2018 Industry Insights Report describes a relatively smooth road ahead for the Canadian credit market in 2019. Average consumer debt balances will continue to increase for mortgage, credit card, and auto. Serious delinquency rates are expected to decline or remain steady throughout 2019. A positive note for the Canadian auto lending market—when cash flow gets tight, consumers go delinquent on credit cards sooner than on than mortgage or auto debt.
Canadian Auto Lending Market Trends: Delinquency Rates
Although auto loan delinquency rates are reported to be at the highest since the great depression, Automotive News Canada quoted Equifax Canada as saying 0.97 percent of all Canadian auto loans were 90 days past due in Q4 2018. To put that in perspective, the auto loan delinquency rate was 1.08 percent in Q3 2009 at the peak of the economic downturn. At this point, one should be cautious, but not overly concerned.
New Car Loan Terms Extend to 74 Months
Auto debt may be easier to manage partly because of longer loan terms. CBC reports on a J.D. Power, Inc. study indicating more than 50% of new car loans are financed for seven years, an increase over the historical average of five years. Low-interest rates and higher new-car prices make longer-term loans attractive, especially for first-time buyers. However, there’s greater risk potential. Consumers begin with a negative equity position. With a 74-month loan, risk exposure continues. Unexpected life events can lead to defaults that become delinquencies.
Canadian Auto Lending Market: The Expected and The Unique
FICO’s 2018 Consumer Survey of Automotive Finance Perceptions Canada is a detailed study worth reviewing. It provides additional perspective—some expected, some unique—regarding Canadian auto lending market trends, such as:
- Generational financing differences: Baby boomers prefer dealerships. Millennials prefer banks. Younger consumers are more likely to pursue digital financing, but digital is not yet the first choice for the majority in any generation.
- Vehicle first, financing second: 78 percent of consumers shopped for the vehicle first, then inquired about financing.
- Dealer financing dominates: 70 percent of consumers obtained loans at the dealership. Only 4 percent of that group would consider online financing online. However, 23 percent indicate they plan to consider online for their next loan.
- One offer is all that’s needed: 60 percent of consumers indicated they consider only one financial offer before making a decision. That behavior might be attributed to a desire to simplify the purchase process, or potentially a lack of knowledge regarding various financing options. However, 89 percent of consumers indicate they obtained a good or excellent deal.
- Streamline the process: 35 percent of respondents said they would accept or at least consider an instant loan offer if that eliminated dealing with a bank or complex paperwork.
A few themes surface from all these findings. Consumers are willing to take on additional debt in light of low interest rates, so there’s continued opportunity for lenders prepared to differentiate their services. Generational differences hint at evolving auto financing trends, particularly mobile. Consumers favor speed and simplicity in auto purchasing and financing. To take advantage of these trends, lenders need to ensure processes are not inhibited by outdated loan origination systems.
Canadian Auto Lending Market: Takeaways for Lenders
What should Canadian auto lenders conclude from these trends? What are the best strategies to maximize current lending opportunities and prepare for coming market changes? Here’s what we think:
- Integrate with dealer management systems (DMSs): With the majority of consumers continuing to seek financing at dealerships, integration with DMSs open lenders to additional sources of lending opportunities.
- Differentiate with fast responses: There’s no shortage of Canadian lenders, especially in the non-prime space. Canadians clearly prefer a streamlined purchase and financing process. Integration with DMS allows loan applications to be submitted electronically. Decision rules and auto-structuring enable lenders to quickly evaluate applications, return decisions in seconds, and increase the chance of booking a deal for the majority of consumers who are satisfied with the first offer.
- Support mobile devices: Millennials and others born of the digital generation do business via mobile devices. Mobile, paperless, and e-contracts are essential capabilities to sustain competitive advantages and lower processing costs.
- Employ analytics: The wealth of process and portfolio information attains greater value when analyzed to identify process improvements and factors that contribute to defaults and delinquencies. Savvy lenders will employ analytics to continually improve process efficiency and reduce risk.
Canadian auto lenders need to evaluate the capabilities of their current loan origination system (LOS). Legacy systems are unlikely to provide the functionality needed to differentiate in today’s market or adapt to the inevitable changes in auto financing trends. Cloud-based loan origination systems offer lenders all of these capabilities, along with lower CapEx and OpEx, faster implementation and configuration to meet the unique lender processes and practices, and integration with a wide range of cloud-based lending services such as alternative data, employment verification, vehicle valuation, and fraud detection, that improve the quality and speed of lending decisions while reducing risk.
Despite the leveling of market growth, there’s every reason for auto lenders who use modern loan origination solutions to be optimistic about the Canadian auto lending market.
defi SOLUTIONS is a leading loan origination and analytics software provider in the US and Canada. We can help your organization meet current and future needs of the Canadian auto lending market. Take the first step toward greater efficiency and reduced risk by contacting our team today or registering for a demo of defi LOS.
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