The refinancing industry at large has always been dependent on consumer awareness. Yes, almost everyone who is buying a home or car (or paying for a college education) knows they’ll need a loan. How many of those people, however, are aware they can refinance their loan?
Beyond being cognizant of refinancing options, there are other barriers in place. A considerable amount of consumers are unaware of how much they can actually save, or simply don’t want to deal with the hassle and paperwork. It’s why 78% of American homeowners opted not to refinance their mortgages in 2021, despite lower interest rates driven by the pandemic.
When it comes to auto loans, over 50% of consumers aren’t even aware they can refinance. That represents a fairly large chunk of the market that is not being properly addressed. And while the pandemic led to greater consumer awareness ― Google searches for auto refinancing increased by 40% from 2019 to 2020 ― refinancing still only makes up roughly 5% of auto loan originations.
Even before the pandemic, the digital acceleration of financial services resulted in more people buying and financing vehicles online. When lockdowns went into effect, along with the subsequent surge in car sales brought on by reduced rates and stimulus spending, it became more clear that refinancing lenders were going to have better access to consumers.
And while the improved interest rate environment did represent a prime buying opportunity, it was inevitable that those same consumers would be in the market once again, only this time for refinancing. According to a survey, 26 of 73 million consumers would be highly motivated to refinance their loan. From a marketing perspective, most are looking for “payment-based savings” (i.e., lowering their monthly payment) rather than simply reducing their APR.
For lenders and marketers, the advantages of auto loan refinancing go beyond the obvious consumer need. It also represents an attractive opportunity to build better, more cost-efficient customer relationships. For example, since most delinquencies occur within the first few months a car is purchased, auto loan refinancing typically has a better risk profile and performance than auto purchase loans.
Similarly, direct-to-consumer (i.e., lender-generated) auto loans generally perform better than dealer-originated loans, which usually have higher markups. When you consider that nearly 80% of consumers finance their cars with dealers, the opportunity for auto loan refinancing becomes even bigger.
Auto loan refinancing is also easier to market than auto purchase loans, since lenders, brokers, and lead generators are able to eliminate the challenges of identifying or predicting which consumers are in the market for an auto loan. They can also target which consumers are less likely to default based on previous track records of loan payment.
While it’s clear there is a big market for auto loan refinancing, coupled with the benefits for lenders and third parties, the art of effectively engaging consumers remains elusive. Historically, banks and credit unions have been slow to explore and grow the necessary channels. Since auto loans are smaller than mortgages for example, the transaction costs for originators are relatively higher.
On top of that, the cumbersome nature of refinancing a vehicle can also be difficult to market, especially with younger demographics that are mostly concerned with convenience. For Gen Z specifically, they are going to seek out refinancing options that are as frictionless as possible and available in the palm of their hand.
That’s where technology comes in. The rise of fintech and AI have not only made it easier for lenders to target the right consumers, but for those same consumers to find the best refinancing offers for their needs in the most hassle-free way possible.
As opposed to traditional credit models, AI incorporates greater data and algorithms to optimize the experience for every consumer, finding them the best rates possible based on their risk profile. In addition, AI underwriting also automates the loan originating process, resulting in more instant credit decisions and less paperwork for lenders.
Through open banking technology, consumers also have less paperwork on their end thanks to pre-populated application fields. These barriers may seem minor (e.g., populating a consumer’s VIN or license plate number), but add up in the grand scheme of streamlining the process. AI models also help in presenting instant soft credit decisions, like pre-approval, which provide consumers better assurance they will get the product they are looking for.
Ultimately, AI and automation reduce the overhead that has burdened brick & mortar financial services for decades. With a market that still has exponential room for growth, it’s important for lenders and third-party brokers to not only highlight the benefits of auto loan refinancing to consumers, but also the technological advancements that have made finding and applying for the right product easier than ever.
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