Auto Finance in 2024: How Non-Prime Lending is Driving the Future

This past year saw some major shifts in the automotive industry. Driven mostly by economic fluctuations, business mergers and layoffs, and ever-evolving consumer behaviour.

Yet among several of the developments, one trend stands apart – the growing significance of non-prime auto financing.

This year more than ever we saw non-prime financing steering away from stigma and emerging as a key solution to help dealers remain competitive and profitable in today's automotive sales market.

So what were some of the trends and forecasts for the year ahead?

A Look Back at 2023

Last year's headlines reshaped the landscape for dealers and financiers alike. Here are just some of the top stories that created a buzz:

• Key players like Canada Drives, Source One Financial and other lenders pulled out of the game, prompting ripple effects to industry professionals and dealer partners.?
• The acquisition of auto remarketing seller Manheim by OPENLANE changed the digital marketplace yet again, as some inventory management companies make a play for a monopoly. What does that mean for prices? No one can say, but dealers are watching closely to see if prices will rise or remain the same.
• And how could we forget electric vehicle (EV) automakers got significant attention in 2023, as they expand their production across Canada. Following suit after the Canadian government announced a new climate-change target that states every new car sold will be a ZEV (Zero-emission vehicle) by 2035.??As the automotive industry gears up for a greener fleet, we can expect a transformative decade, from new charging stations to other infrastructure to support these vehicles.

The reflection of 2023 in the rear-view mirror highlights that the automotive industry is transforming, with a clear call-out that those who adapt and innovate are going to thrive in today’s landscape.?

Dealers can remain confident; despite some lenders exiting or merging, companies like Rifco remain poised for growth, steadfast in their commitment to support dealer partners through these changes.

2024 will bring many changes to how business is done in the automotive space.? You’re starting to see a bigger shift and advancement in the use of technology. The amount of data and insight it brings is significant. The businesses that are serious about it and leverage its capabilities will be the ones to benefit the most. - Roger Saran, President Rifco National Auto Finance

The Anticipated Market of 2024 | What To Look Out For

We’re all looking at the road ahead. 2024 is poised to be a year of continued evolution in the auto finance sector. Interest rates remain a crucial factor, with their volatility affecting dealer strategies and consumer purchasing decisions.?

Looking ahead three factors could influence the success of auto dealers:

1. Inventory Remains A Top Challenge:

The ongoing struggle with inventory hasn’t seen a return to pre-pandemic levels, but expect to see a shift in the landscape.

Dealers have been managing with a 45-day supply, but there’s been evidence of a ?trend since December 2023: wholesale prices have been gradually falling, about 0.5% every week.?

This can be a double-edged sword. Great for dealers adding to their inventory, but tough for those with cars on the lot.? With vehicle values dropping that means a steady dip in profits every day they sit unsold. We can prepare to see a frenzied sell-off this spring if things continue the way they’ve been going.?

2. Economic Factors Affecting Purchasing Behaviour: ?

Something we’re bringing with us into the new year is the reality that consumers remain cautious. Canadians are taking longer to commit to purchases or holding off as a result of high-interest rates.?

As borrowing costs fluctuate, consumer demand may waver, leading to a potential dip in sales. So what does this mean for dealers? It may be time to develop new strategies to ensure profitability.

Quick Decisioning Is A Must: Dealers can gain leverage on buyers shopping around by offering quick approvals. Utilizing Income-Verified technology and a quick approval can help shorten the sales cycle.

3. Technology Continues to Reshape the Game:

Every day, but especially in a competitive market, dealers are thinking 3 steps ahead. But what worked in years past may not be what will allow you to be successful in 2024 and beyond.

Successful dealers are finding a balance between building and nurturing relationships, focusing on exceptional customer experience, while embracing technology as part of their sales strategies to capitalize on new opportunities and today’s customer base.?

The Growing Significance of Non-Prime Customers

The NP consumer segment's growth stands out as a key trend in the auto industry's transformation.

Shifting Segments ??

Notably, the migration of individuals with prime credit to non-prime credit. This shift is evident in the Q2 2023 auto originations data, where out of the total 446,000 auto originations, 10% were in the subprime risk tier. Consequently, dealerships are increasingly relying on NP financing to sustain sales, adapting to this changing credit landscape.

This shift begs an industry to reevaluate the myths surrounding NP financing.

Contrary to common misconceptions, non-prime customers are not exclusively high-risk borrowers. Last year alone the non-prime customer segment in Canada has diversified, with a notable increase in young professionals aged 25-35 and individuals who have experienced recent financial setbacks due to economic changes.

What’s Happening to Buyers Credit? ??

Additionally, the belief that multiple loan applications (shotgunning) harm a consumer's credit score doesn’t hold water, as these inquiries are viewed as a single event.?

While hard inquiries from applying for credit can affect a credit score for up to a year, multiple inquiries for certain loans like auto or home within a 14 to 45-day window are counted as one, reducing their impact. You can find more on hard inquiries here.

The New Reality For Buyers, Dealers and Lenders ?? ??

The economic reality is that the number of non-prime customers is growing, and becoming an increasingly important segment for dealerships.

For dealers, this means efficiently and quickly evaluating potential leads is essential, and managing a rising volume of applications is crucial for maintaining business efficiency and profitability.?

Simply put: tech adoption streamlines the financing process, reduces bottlenecks, and enhances fraud prevention measures, all of which allow dealers to maintain efficiency and profitability.

Preparing Dealerships for Tomorrow

For dealerships to thrive in 2024 and beyond, understanding the evolving market dynamics and being prepared to adapt strategies accordingly will be key to success.

Here are 3 key strategies dealers can steal:

• Embrace Financing Technology: Integrating technology for faster approvals enhances efficiency and prevents fraud. Dealerships can streamline their sales processes, eliminating bottlenecks. This not only speeds up transactions but offers customers a variety of ways to provide necessary information for securing the best loan deals.
• Create Exceptional Customer Experience: Tech implementation equals faster sales and more choices for customers. This leads to smoother transactions and quicker, secure loan options.
• Safeguard against Fraud: Fraud is on the rise. Dealerships can protect themselves with Rifco's proprietary technology RifcoVerify by combating a huge challenge today - proof of income verification. It streamlines income review and safeguards against fraud, ensuring a safer, faster financing process for dealers and customers in one shot.

Today, more lenders are adopting online platforms for income and identity verification. In a sector where fraud is a growing concern, the integration of secure and efficient tech solutions is no longer optional but essential.

A Final Word

We are lucky to be working with some of the best dealerships in the country.? There have been many ups and downs. And we’re fortunate that as we leave 2023 behind, we can look at our dealer base and congratulate every one of them for a job well done.? - Patrick Beronilla?

However 2024 unfolds, the auto finance sector will continue to fluctuate and evolve. But some things remain the same year to year.?

Focus on people, stay open and adaptable, and embrace shifts as an opportunity to change and thrive in an increasingly complex market landscape.

From your partners here at Rifco National Auto Finance, we wish you a successful year and look forward to celebrating your wins alongside you.

Have a question or want to set up a quick call and discuss your 2024 plan? Let’s chat. Reach out to us via LinkedIn Messaging and we'll get back to you.