As banks continue to lose market share to credit unions, refinancing may be a short-term way for them to gain customers. And dealers should be cognizant of the potential strategy.
As long as lenders refinance customers 30 to 60 days after the loan was originated, they avoid the first-payment or early-payment default window, said Brian Landau, senior vice president and automotive business leader at TransUnion, and refinancing saves customers an average of $50 per month on their auto loan.
Refinancing is less expensive for lenders because they don't need a field team to support dealer relationships. They target customers directly.
Sounds like a win for lenders, but dealers, beware.
If a customer refinances an indirect loan in the first 90 days, the dealership would be charged back for the loan and any F&I products the customer purchased, Landau said.
Especially for dealerships that include dealer reserve on the loan, lenders can "sort of wipe away" the reserve via refinancing, Landau said.
With dealerships facing profitability challenges across the board, the F&I office is under increased pressure to make up for limited profit on the front end of the transaction. Still, F&I managers should also be mindful of what could happen 30, 60 or 90 days down the road.
Dealers should be aware of customers with an affinity to refinance, said Landau. If customers have many loans with the same lender, they may be more likely to refinance with that lender to take advantage of loyalty programs and a single access point.
Dealers should also offer the most attractive interest rate possible so that consumers are less likely to find a lower rate elsewhere.
Dealers can also determine how long the consumer will be in a negative equity position on the original purchase. Many lenders won't refinance a loan if the customer owes more than the vehicle is worth. Dealers should keep track of customers' negative equity status and follow up when they're out of the red.
Learning about customers' lending habits and conveying the value of the dealership's F&I products could prevent today's profit from becoming tomorrow's chargeback.