Disruption and Innovation in US Auto Financing

The US auto financing market, traditionally stable, faces disruption as demand surges and new players enter. On the back of a 20% increase in demand in 2021, the growing automotive finance market has been fueled by rising used-vehicle prices and EV sales. A gradual upward credit migration among US auto finance consumers has also prompted banks to get more involved in the space, despite the market traditionally being dominated by indirect lending through dealership finance offices. To learn more about McKinsey & Company’s insights into the disruption and innovation occurring in the auto finance industry, read the full article here: 

https://www.mckinsey.com/industries/financial-services/our-insights/disruption-and-innovation-in-us-auto-financing

6 Takeaways From Consumer Reports' Car Loan Investigation

Driven by convenience and low advertised rates, consumers are likely to choose to finance their vehicles through indirect lending at the dealership. However, there are potential pitfalls that consumers should be aware of including inflated interest rates, unfavorable loan terms, predatory lending practices, and hidden fees—just to name a few. 

With auto loan debt in the United States surpassing $1.4 trillion, it's crucial to understand the risks associated with borrowing for a vehicle. According to Consumer Reports' analysis of nearly 858,000 auto loans, borrowers are often paying more than they should, with interest rates varying widely even among consumers with similar credit scores. This points to the likelihood of personal judgment and bias informing interest rates rather than objective underwriting. This inconsistency in lending practices raises concerns about the lack of fairness and transparency in auto lending.

Another striking revelation from Consumer Reports' investigation is that even consumers with excellent credit scores may find themselves saddled with inflated interest rates, suggesting that dealers and lenders might be charging what they think they can get away with rather than solely considering risk. Additionally, many borrowers are burdened with loans they can't afford, with nearly 25% spending more than 10% of their income on car debt, increasing the risk of default and repossession. It's clear that these practices impact consumers negatively but they also cause knock-on effects on the capital markets and highlight the need to be vigilant when navigating the auto lending landscape. 

To learn more about the findings from Consumer Reports' investigation, read the full article here: https://www.consumerreports.org/money/car-financing/takeaways-from-consumer-reports-car-loan-investigation-a7711549994/

Carputty is happy to announce our acceptance into the ICBA! We are here to provide auto lending expertise to community bankers nationwide.

Automotive finance is a growing market poised for positive disruption and improved regulation; Carputty is a digital-first solution aimed at eliminating existing pain points for borrowers and lenders. Almost 80% of all auto financing is originated at the dealership level, where manipulation of consumer data and vehicle valuations can run rampant.  Did you know that dealers can mark up rates 5 points or more without disclosing it to the borrower? These practices have ramifications on the secondary market as well, with higher LTV and DTI ratios driving higher delinquency rates.

Carputty is a direct auto lender that has created the first line of credit strictly for automobiles: the Flexline. With the help of open-source banking tools like Plaid and Experian, we verify credit and income online and underwrite borrowers in minutes. Carputty decouples the transaction from the financing - we like to say we are underwriting the borrower, not what the borrower drives. By focusing on a borrower’s ability to repay, we can offer very competitive rates primarily in the used car space. A line of credit up to $250,000 is granted upon credit approval; subsequently, each financing transaction is structured as a traditional fixed rate, fully amortizing auto loan, secured by the vehicle. From the very beginning of the lending process, Carputty promotes transparency by showing borrowers their margin and final rate, allowing them to shop confidently without the common frustrations of a dealership's financing office. Carputty is auto lending “in a box” and can help banks offer the product, while we handle the servicing.