Used vehicles provide big opportunities for lenders, TransUnion says

Shifting consumer demand, changes in vehicle supply and growing issues of affordability in the new-vehicle market are prompting key players in auto retail to pivot toward used vehicles.

Lenders can find many opportunities to take advantage of this shift to grow their auto portfolios through used-vehicle loan and lease originations, according to TransUnion's Brian Landau.

Partnering with digital startups, engaging with traditional retailers and recognizing opportunity with higher credit tier customers are among the ways lenders can thrive as the market shifts, said Landau, automotive business leader at TransUnion.

Landau last week hosted a webinar, "Opportunities in Used Financing," for American Financial Services Association members.

As banks and credit unions pivot to used vehicles to avoid competition from captive finance companies, they create new sources of revenue and profit for lenders looking to grow faster than the overall vehicle market.

"They avoid direct competition from OEMs and the captives who offer very attractive incentives on new vehicles," Landau said during the event. "It creates a new source of revenue for them."

To grow used-vehicle originations, lenders don't have to look far from traditional sources, Landau said. More used-vehicle business is coming to auto lenders from franchised retailers, particularly those that have invested in used-only operations.

Partnering with digital startups in the financial technology sector can also incrementally grow lenders' used-vehicle portfolios, Landau said. Using digital platforms and partnerships with traditional retailers, startups are sourcing vehicle inventory from individual owners, offering vehicle inspection and reconditioning services, providing no-haggle pricing for consumers and managing delivery and paperwork of vehicles, he said.

"They're removing all those hurdles and adding these services as part of the offering, enticing many consumers to purchase in this new way," Landau said. "For lenders that are looking to enter this space, the opportunity is to partner with some of the more established startups."

Lenders that cater to prime-and-above borrowers should also consider offering more used-vehicle financing options, Landau said. More prime-and-above customers, which TransUnion defines as customers with credit scores of 661 or higher, are turning to the used-vehicle market in droves.

For lenders that restrict funding to a higher threshold, such as a 720 credit score, Landau advises: "Consider entering the used space. There are plenty of borrowers out there that fit your credit profile."

Meanwhile, cash-crunched consumers are also increasingly turning to the used-vehicle market. Customers can save, on average, $15,000 on a used-vehicle purchase, according to Landau, or $120 per month, compared with a new vehicle. The price difference is appealing, particularly for younger consumers burdened with student loan debt.

"That's a 40 percent discount. You're not going to get that from an OEM with a new-vehicle incentive," Landau told Automotive News.

There's a larger pool of used vehicles than new in the market, and used is growing at a more rapid pace. However, financing penetration is significantly lower in used than in new, meaning auto lenders have more opportunities in used financing.

According to TransUnion, of the 17.3 million new vehicles sold in the U.S. in 2018, 75 to 80 percent of them were financed. Comparatively, 40.4 million used vehicles were sold last year, 35 to 40 percent of which were financed.

The used-vehicle market is growing faster than the new-vehicle market. New-vehicle sales grew 0.6 percent in 2018, while used-vehicle sales grew 3.1 percent. In 2014, in contrast, new-vehicle sales rose 5.9 percent from year-earlier figures, and used-vehicle sales climbed just 1.3 percent.

As banks and credit unions pivot to used vehicles to avoid competition from captive finance companies, they also create new sources of revenue and profit for lenders looking to grow faster than the overall vehicle market.

"They avoid direct competition from OEMs and the captives who offer very attractive incentives on new vehicles," Landau said. "It creates a new source of revenue for them."