We have all seen the studies. Most consumers are living from paycheck to paycheck. Since the Great Recession, median income has fallen by 13% from 2004 levels, while expenditures have increased by nearly 14%. 1
In another recent study, it was determined that almost half of the consumers in the U.S. have less than $400 in disposable income above their monthly budget; and, they would need to find alternative financing if an emergency occurred with a cost greater than this amount.2 One unexpected expense, like a broken pipe or unexpected car repair, will disrupt a household’s budget.
Consequently, consumers have become VERY expenditure conscious, trying to find new ways to save money each month. And consider this, auto loans are typically one of the top three monthly payments for many household budgets.
Those of us working in the financial industry understand that the interest rate is important to repayment of a loan. Consumers know this too, but at the time they are purchasing a new vehicle, they are far more concerned how the total monthly payment amount may affect the balance of their checkbook.
Proof of this is the volume of consumers paying a higher interest rate than what many local, community-based financial institutions typically charge. Consider the data in the chart below:
| Credit Score Ranking | Consumers Paying Above Market Rates |
|---|---|
| A Paper — 720+ | 70% paying more than 5% interest rate |
| B Paper — 680 – 719 | 71% paying more than 6% interest rate |
| C Paper — 640 – 679 | 53% paying more than 8% interest rate |
Most loan recapture program offers focus mainly on interest rates. Unfortunately, overall response rates tend to be low, and marketing costs often outweigh any profits generated. The exception to this rule is offering extremely low interest rates, which then cuts interest margins to a less than desirable outcome.
Here’s a good test of this theory…Ask five of your friends, neighbors, relatives, (except those that work in the financial industry) if they know their auto loan interest rate to the nearest tenth of a point. Usually 4 out of 5 will tell you that they don’t know it. Ask those same people if they know what their monthly payment is, and usually 5 out of 5 people will respond yes. And in many cases, down to the penny!
So, what are some of the best practices to recapture profitable auto loans?
Focus on monthly payments, not rates.
Speak your prospects language. Focus the offer on what is most meaningful to their bank account (monthly payment) over what is most meaningful to a bank or credit union (interest rate).
Use credit bureau data.
This data is very critical in determining which households could actually save monthly and yearly on their auto loans. You can create a very compelling and personalized offer for that consumer, thus, generating more interest and response. This data also allows you to prequalify prospects based on your institution’s credit approval criteria. Though this may involve additional front end time and expense, using a pre-qualified consumer list will create higher conversion rates of applications to funded loans. Plus, it will save your loan officers time as well.
Use multiple channels to reach out to prequalified households and provide several easy response options.
It shouldn’t need to be said, but please make your response options easy for the consumer. Give clear direction and offer alternative ways for them to respond. That includes online response forms as well as the more traditional phone number, email, or branch visit. Also, we highly recommend following up with a phone call as well. Just remember that most families now have two wage earners. The best time for them to communicate may be in the evening, after work. Calling during normal business hours may leave you with a lot of unanswered phone calls.
When utilizing a pre-qualified credit data list, create incentives to encourage actual applications.
After all, you have pre-determined which prospects are pre-qualified with your institution’s credit criteria; and, you have already determined you can reduce the prospect’s monthly payment. Any application received should produce a high closing rate. The extra upfront analysis and credit data will drive responses that are well worth the extra time and cost. In addition, this personalized message tells the consumer that your institution must be confident that you can reduce that household’s monthly payments. That is a powerful underlying message!
Create additional loan funding incentives.
Ok, you have a good qualified application on your desk, now offer an additional incentive to help close the deal. For instance, a delayed first payment for a couple of months has great results considering the fact many consumers are living “paycheck to paycheck”. Plus, it is easy for that applicant to understand the benefit; and your institution will still accrue interest during that time frame.
Find a marketing partner with experience and willingness to minimize your out-of-pocket expense.
It is easy to send out a postcard or mailer featuring interest rates. However, to generate the best response, and the most funded loans, it takes some coordination, data analysis, creative knowledge and insight to get there. Pay-for-performance marketing programs are few and far between. At Stellar Strategic Group, we offer a pay-for-performance program minimizing your risk related to up front marketing cost.
Utilizing the best practices above, many financial institutions are finding success! Take this one example:
A $750MM asset credit union wanted to focus on households across all credit tiers. The pre-qualified offers were evenly distributed across all paper grades. We utilized the current credit rates the institution could offer with the rates of the consumer’s current loan, as well as any credit criteria restrictions. In this instance, we targeted consumers with $10,000 or more in remaining balances.
After the campaign, closed loan data was used to match back to households receiving the personalized offer. Our client’s data showed over $1.8MM in newly booked loans came from our program. The refinanced members saved an average of over $95 per month on their new loans, or over $5,000 over the life of the loan.
The average blended interest rate for all funded loans was 7.78% (which was not a discounted rate), and was expected to bring over $293,000 in interest income alone. This does NOT include the additional non-interest income from cross-selling, AD&D, GAP, MBI, or other relationships generated from establishing the auto loan, such as checking.
With interest income alone, this institution had an ROI of 473%! Also important to note, this credit union had no up-front costs. Their success was based on the program’s performance. Many other financial institutions that have implemented our program have achieved similar results.
It just goes to show…a well-defined strategy can generate great results in the auto loan recapture market.
George Monnier has spent over 16 years helping financial institutions generate new deposits and loans. He is a founding partner of Stellar Auto Loans, a division of Stellar Strategic Group, LLC, which offers pay-for-performance auto refinance programs to the banking industry. To learn more about Stellar Auto Loanssm, please contact george.monnier@thestellarfinancialgroup.com or 402-708-2425.
1 The Pew Charitable Trusts: Household Expenditure and Income: March 30, 2016
2 The Atlantic: The Secret Shame of Middle-Class Americans: May, 2016