Weathering this Storm and the Next – Three Tips for Auto Lenders

With a series of crises that don’t seem to be letting up — from waves of COVID to economic downturns and inflation to geopolitical disasters —  it’s critical for auto lenders to continually revisit and improve their processes to ensure that they are ready for any shocks that can affect business not only to survive, but to capitalize on significant changes. In this piece, I’ll discuss three tips for auto lenders to improve and prepare for the future.

The Lending Experience Matters More Than Ever
The Federal Reserve has raised interest rates to combat inflation, and interest rate hikes can be expected to continue. Combined with supply chain issues, demand for new cars is expected to wane this year. Those consumers who do forge ahead and purchase a vehicle are more likely to shop around and compare rates offered by different lenders.

While offering attractive interest rates is certainly one way of reeling in more applicants, it’s certainly not the only way. If one financial institution offers just a slightly better rate, another competing financial institution may still be able to seal the deal without having to change its own interest rates. Based on my observations of lenders we partner with, the most successful lenders are able to differentiate themselves in other meaningful ways, even during these challenging times. Here are three of them.

1. Go Online
People are too busy to deal with cumbersome physical paperwork. A lender can set itself apart from the pack by offering a streamlined online experience. According to one study, 58 percent of customers want the option of completing their loan applications entirely online. This makes sense. Between juggling work, family, and other obligations, the last thing customers need is to take time out of their day to go to the dealership or lending institution for the express purpose of applying for financing.

Ideally, lenders should work with dealerships to ensure that customers can apply for financing even before setting foot in the dealership. They should be able to get the identity verified, stips reviewed, and application sent over through their mobile phone or desktop computer — all without being redirected to a physical location.

2. Shorten the Time to Funding 
The same study found that a lengthy loan application process reduces the likelihood of the loan getting funded. Potential borrowers are overwhelmed by the number of stips and forms they’re required to submit, and fail to complete the process. In other cases, lengthy lending cycles increase the probability of mistakes; the more that’s required of borrowers, the more room for error.

Lower-income individuals are particularly burdened by long turnaround times. Twenty-six percent of this group are required to submit six or more stips as part of their application. Yet due to the time-related stressors on this group (e.g., lack of work schedule flexibility and control, limited resources), lenders need to make sure lengthy processes aren’t alienating them. While certain things like additional required stips may be necessary, they should be as simple and straightforward to submit as possible.

3. Embrace Automation
Automation on the backend side of the auto lender is crucial. For example, algorithms can be employed to automatically reject or approve an auto loan application. The most advanced of these loan origination systems (LOS) rely on AI to mine data from different sources — think credit history, address, utility usage — to calculate the risk involved in approving a particular loan.

But customer-facing automation also shouldn’t be overlooked. Digital workflows can be set up to keep the ball rolling between different stages of the loan application, from identity verification to stip requests to the application form. This ensures that customers are requested to submit exactly what’s needed based on their borrower profile, all without relying on employee know-how and decision-making.

The Bottom Line
While so much of what’s going on in the world today is outside our control, we can control the experience our customers receive. Despite shortages of car models and rising interest rates, the best lenders can distinguish themselves by offering a lending journey that’s online, fast, and automated.