As 2012 gets under way, here are five trends that experts say are likely to affect your finance and insurance business this year.
1. More players mean more competition. Auto loans likely will continue to outperform other forms of consumer credit in terms of risk -- that is, delinquencies and defaults. That's true of subprime auto loans as well as prime-risk loans relative to other consumer debt. Thus, small, medium and large lenders, plus some private-equity firms, are investing in auto loans. The upside is lenders could be courting dealers.
Duane Freeman, vice president of national accounts for Dealer Financial Services at Bank of America, says his company is "bullish" on auto lending. "The auto consumer product has performed really well in the downturn compared to some of our other business, like mortgages," he said at an auto finance conference in October.
"It's a good, consistent product that can deliver consistent returns."
But existing players aren't the only ones looking to up their game. Newcomers, such as Red Ridge Finance Group, a private-equity firm that acquired a majority interest in subprime auto lender Excel Finance Holding Co. in December, and re-entrants, such as TD Auto Finance, which is looking to revive the former Chrysler Financial, are looking for auto loan business, too.
2. Thinner interest-rate margins. While auto lender margins seem to be holding up for now, increased competition among lenders could eventually mean lower interest-rate margins to share with dealerships. Last year, lenders cautioned each other about irrational competition, such as cutting margins to chase unprofitable market share.
3. Greater volume. Lenders and dealers need higher industry sales volume in 2012 to offset some or all of the potential downward pressure that sharper competition puts on per-unit profits.
And they'll likely get it. A late December forecast from J.D. Power and Associates puts 2012 U.S. light-vehicle sales at about 13.8 million.
Last year, 12.8 million light vehicles were sold.
The TransUnion credit bureau says auto finance is well-positioned to support that growth. Last month TransUnion said it expects auto delinquencies to remain at record-low levels in 2012. In turn, that encourages continued improvement in credit availability, which along with the possibility of lower vehicle prices and recovering household finances should help produce higher vehicle sales volume.
4. Greater emphasis on aftermarket products. Dealerships show no sign of letting up on a long-term trend toward marketing a complete menu of F&I products to nearly every new- or used-vehicle customer. Increasingly, that extends to service customers as well.
New technology helps. Kevin Cohan, managing partner for Jim Coleman Honda and Jim Coleman Jaguar-Land Rover in Clarksville, Md., said in an interview last month that computer software makes it much easier to sell extended-service contracts in the service lane. That's because service writers can handle the entire transaction at their own work stations, without having to turn the customer over to an F&I manager, he said.
5. New regulation. The new Consumer Financial Protection Bureau doesn't have direct supervision over most franchised dealerships -- just those that have buy-here, pay-here operations. Moreover, it has been hamstrung by a political battle over appointing a director. But if the bureau gets its act in gear this year, look out. It could cause dealerships headaches by generating new requirements for financial institutions that make auto loans via dealerships.
And judging by the bureau's proposals for mortgages, new requirements for auto loans could include new disclosures and new loan documents that make customer costs more transparent and loans simpler to understand.