Auto Loan Analysis, Pt. 2

Part
01
of four
Part
01

Consumer Motivations: Auto Loan Aggregators

The most important motivations and considerations for consumers shopping for auto loans using an auto loan aggregator are convenience, comparison shopping, speed, and loan approval and interest rates.

Key Findings

  • In 2019, 13% of US consumers acquired their most recent auto loan online, compared with only 5% of consumers in 2018, so loans through loan aggregators are on the rise. "Today’s digital-savvy consumers said they valued online financing for the following reasons: 1) convenience, 2) the ability to comparison shop across lenders, and 3) speed."
  • Convenience: One major benefit of auto loan aggregators is that consumers can quickly and easily find multiple loan offers. A recent survey found that convenience is highly important to consumers, with 91% of those surveyed stating that they would "accept (or at least consider) an instant vehicle loan offer if it meant avoiding dealing with a bank or doing extra paperwork."
  • Comparison Shopping: Another key motivator for consumers to use a loan aggregator is that they can easily shop around for different loan options without needing to visit a physical dealership, bank, or lending institution. Consumers can compare rates without even visiting multiple websites. According to the National Financial Capability Survey conducted by the FINRA Investor Education Fund, 50% of consumers comparison shop for an auto loan. A FICO survey found that 95% of consumers consider one to three lenders before choosing a loan, and 60% reported that being instantly able to compare multiple loan offers was important to them when shopping for auto financing.
  • Speed: For many consumers, speed is a key factor when shopping for an auto loan. Many car shoppers need a vehicle urgently due to an accident, breakdown, or other factors. As a result, the ability to find, apply for, and be approved for an auto loan all through one aggregator is highly appealing. According to the Consumer Financial Protection Bureau, some car consumers have only one or two days to purchase a car, so speed is key.
  • Loan Approval and Interest Rates: A major consideration for borrowers is getting approved for a loan with an acceptable interest rate, particularly for borrowers with poor or fair credit. Nearly every source we encountered advises these borrowers to use loan aggregators to compare offers. In addition, loan aggregators create a path to borrowing for borrowers who won't get approved by traditional lenders such as dealerships or banks. This process is highly important for consumers, as a report from JD Power found that auto loan borrowers with fair credit will end up paying four times as much as borrowers with excellent credit.
Part
02
of four
Part
02

Auto Loan Aggregators: Demographics

Auto Loan Aggregators in the U.S.

In the United States, auto loan aggregators such as LendingTree and Autopay hold consistent popularity among those 25-and-older, while they struggle to appeal to younger, lower-income, and higher-education demographics; this is largely the result of APR/premium volatility and student loan debt.

Age

  • Due to the aggressive and dynamic pricing methods of auto loan companies, which can be affected by anything from the applicant's home location to their education level, aggregators tend to be less popular with young demographics (age 25 and below).
  • LendingTree, one of the web's most popular car loan aggregators, receives 40% of its traffic from the 25-40 age range.

Gender

  • According to an extensive YouGov study that took place over the last year, aggregators like LendingTree are equal in popularity among both males and females.

Income

  • Many aggregators compete by setting low minimum income requirements, however, these minimums are often lower than the functional average income of their user base. For example, Autopay has an income requirement of $2,000 per month, but their average user income sits at $6000 a month.

Education Level

  • An average user of any auto loan aggregator will generally have a high school diploma or GED. This is the result of several factors: college student borrowers often steer away from car loans due to extremely high APRs, and college graduates tend to steer away from car loans due to ailing credit and already-steep debt from school.

Credit History

  • Many auto loan aggregators will ask for minimums lower than the national average credit score of 700 (often between 500-680), but the average of all the customers they work with will usually be at/above the national average. Autopay, a particularly popular aggregator, has a customer average score of 706.
Part
03
of four
Part
03

Auto Loan Industry: Overview

According to different sources, car financing began officially in 1919 in the US with General Motors as the trailblazer when it established the General Motors Acceptance Corporation (GMAC). The GMAC was a financing option that was aimed at helping American households afford The Ford Model T, and it required lenders to pay a 35% down payment and 12 monthly payments.

Auto Loans Brief Background

  • An auto loan, sometimes referred to as a car loan, enables Americans to purchase cars without having to pay the full amount upfront.
  • The lender then has to pay back the auto loan with interest. Payments are mostly made monthly.
  • According to Finder, most auto loan companies give out car loans to individuals with a credit score of 707 and above, but there are still options for individuals whose credit scores may be lower.
  • The car is used as collateral to secure the auto loan leading to lower Annual Percentage Rates (APRs) when compared to unsecured options. However, if the lender fails to pay back the loan, the car can be repossessed.

History of Auto Loans in the US

US Auto Loans Industry Key Statistics

  • According to data collected by Lending Tree and the Federal Reserve Bank of New York, Americans hold a total of $1.2 trillion in auto loans at the start of 2020. This is twice what the loan amount was a decade ago.
  • According to TransUnion estimates, the average American auto loan borrower had a balance of $18,500.
  • Auto loans contribute about 10% of all household debt and are the third-biggest contributor to the debt after mortgages and student loans.
  • According to Investopedia, "while auto loan debt continues to rise, the percentage of delinquent borrowers remain at a lower than average level and auto sales remains strong - for now."
  • The following statistics hold on the US auto loans industry, according to a study by SuperMoney:
  • According to SuperMoney, some future predictions on the state of the US auto loan industry include: interest rates will rise, finance companies, credit unions, and captive lenders will gain more market share, auto leasing segment will continue to experience growth, personal auto financing will drop, auto lenders will need to adapt.

How Auto Loan Aggregators Impact the Industry

Part
04
of four
Part
04

Auto Loans: Financial Wellness

Having an auto loan affects consumers' financial position in various ways depending on the stage of the loan process, which includes shopping for an auto loan, applying for a loan, and making payments. The financial impact is generally linked with the increase and decrease in credit scores and the debt-to-income ratio as a result of the changes in the credit utilization rate, credit mix, and time factors.

Shopping for Auto Loans

  • When shopping for an auto loan for the best rates, multiple credit checks from lenders may result in several hard inquiries in the credit report. However, multiple hard inquiries within a 30-day period will generally only count as one when the FICO score is calculated. The VantageScore has a 14-day window for shopping.
  • An article from the Consumer Financial Protection Bureau states that shopping for the best deal for an auto loan will generally have little to no impact on credit scores and that the benefit of shopping will have a far outweigh any negative impact on the score. To minimize this impact, it is recommended to limit the shopping period to 4-45 days.

Applying for a Loan

  • Net Credit states that applying for an auto loan will lower credit utilization and increases the credit score prior to making the first payment. Starting payments will increase the credit utilization and decrease the credit score until the loan is paid or when the balance is 30% or less of the original loan amount.
  • According to Nerd Wallet, taking an auto loan affects the credit standing in two ways; it adds a hard inquiry to the consumer's credit report and temporarily deducts a few points from the score, and assuming the payments are always made on time, it will have a positive effect on the credit score. The temporary loss of points will be "more than offset" by a history of on-time payments.

Early Payments

  • Experian states that when trying to establish credit or improve the credit score, having an open auto loan account is more helpful than paying it off early. If there are only a few credit accounts, an open car loan will help build credit history. It will also improve the credit mix with diversified types of credit with both revolving credit (with a carry forward balance such as credit cards) and installment credit (with a fix monthly payment).
  • On the other hand, settling an auto loan early will help improve the debt-to-income ratio (DTI). Lenders expect a DTI of 43% or less, and many prefer a ratio below 31%. Paying off the car loan early will improve the chances of qualifying for a mortgage.

Late Payments

  • While on-time payments will benefit credit scores significantly, falling 30 or more days behind on payments may risk having the vehicle repossessed by the lender in addition to a damaged credit score.
  • According to AutoPayPlus, there are several factors that determine whether late payments on an auto loan will lower the credit score. The main factor is whether the delay has been reported to the credit bureaus. The typical time span is 30 days past the due date and can vary according to the lender. A single 30-day late payment will result in a drop of 90-100 points from the FICO credit score.
  • The article further states that the exact drop in the score will depend on other factors such as "credit history length, delinquency history of other credit accounts and current outstanding balance on the late account."


Sources
Sources