More customers are applying online for direct auto loans, auto lenders say. But dealers needn't worry about slimmer finance profits just yet; most customers still get indirect loans through a dealership, data from the Power Information Network show.
Online requests for direct auto loans pose no threat to dealers … yet
Auto lenders say online applications are up because:
- In all industries, shoppers are more accustomed to doing business on the Internet.
- Direct lenders, including banks and insurance companies that own banks, have launched smartphone apps that make it easy to apply for an auto loan;
- Some customers apply for direct loans so they can compare deals with what a dealership is offering.
But when it comes to actually getting a loan, the vast majority of customers still get indirect loans, negotiated at the dealership, in which the dealership earns a share of the interest income.
"Direct is not going to be your core business; it's going to be your side business," said Lana Johnson, vice president for Dallas-based Santander Consumer USA. Santander originates mostly indirect loans via dealerships, but it also generates a small percentage of direct loans -- fewer than 10 percent of the total, Johnson said.
"It's something we're excited about primarily for the future," she said. Online applications for direct loans now make up 15 to 20 percent of total auto loan applications for Santander. Many of those ultimately turn into indirect loans, Johnson said.
Bad in the long run?
In the long run, higher share for direct loans could be bad news for dealerships because direct loans are less profitable for them than indirect loans.
On indirect loans, dealerships can make hundreds of dollars in finance reserves, a dealership's share of the interest-rate profits. For example, public retailer Lithia Motors Inc. made an average of $395 per vehicle in finance reserves in the third quarter this year, up from $340 a year earlier.
On direct loans, dealerships earn a lot less, ranging from nothing to a flat fee of up to a couple of hundred dollars.
In Santander's case, Johnson said, the lender works to avoid "channel conflict" between dealers and the direct channel.
Santander refers online loan applicants to dealerships in the Santander network as "preapproved" shoppers. Many of those get converted to indirect loans, Johnson said at an auto finance conference in Las Vegas last month. She said Santander also keeps customer pricing and approval standards equivalent between direct and indirect loans, to avoid steering customers to direct loans.
USAA Bank, which is part of the United Services Automobile Association financial services company, also refers direct-loan customers to a network of specific dealerships.
For now, direct loans aren't making much of a dent. According to the Power Information Network, market share for the category that includes direct loans is down from 2008-09 recession levels.
During that recession and credit freeze, the captive finance companies had trouble borrowing money to make new loans. Market share picked up for cash buyers and direct loans combined, reaching as high as 31 percent in the third quarter of 2009. Today, with the captives competitive again, the "cash" category has fallen below recession levels, down to 22 percent in the third quarter this year, PIN data show.
Even so, Duane Freeman, vice president for national accounts at Bank of America Dealer Financial Services, said at the conference he expects the direct channel to grow: "Only two out of 10 (buyers) have financing arranged ahead of time. It makes sense that will grow over time."
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