Online Financing No Longer Draws Only Subprimers

In the past, online consumers seeking auto loans mainly had subprime credit ratings. They figured if they got turned down, they’d rather avoid the awkwardness of a person-to-person rejection.

Today, a much wider range of borrowers uses the Internet to arrange auto financing, including people with sterling credit.

“A larger percentage of consumers are doing credit applications online,” says James Houston, J.D. Power’s managing director-consumer lending and automotive finance.

“It used to be, ‘Will I be approved?’ Now, we are seeing people with high FICO scores (submitting online credit applications),” he says during a J.D. Power webinar. “It’s one of the biggest things we’ve seen.”

 “As more consumers go online looking for vehicles, they’re also researching financing options earlier,” he adds. Those pre-dealership-visit financing explorations are up five percentage points from 52% last year, according to J.D. Power tracking. Research.

On the customer satisfaction front, consumers are happier getting loan approval online “so they don’t have to go through that process at the dealership,” Houston says. “Consumer sentiment has shifted to ‘I no longer want to spend a lot of time at the dealership worrying about financing.” Moreover, “we’re seeing more dealers embracing that.”

James Houston

Automakers’ captive finance arms currently account for 75% of new-vehicle lending. That’s up from 60% two years ago, according to J.D. Power. (James Houston, left)

The research company attributes the increase to the generous zero-percent financing terms automakers – through their captives – have offered to new-vehicle buyers lately to spur sales during the coronavirus crisis.

Many of those customer incentives include relatively long 84-month loan terms. Conventional wisdom was that the more stretched out loan term, the longer a consumer waits to buy a new vehicle.

But current research indicates the buying cycle for people with long-term car loans is about the same as it is for consumers with shorter-term financing, says Tyson Jominy, J.D. Power’s vice president-data and analytics.

Still, long loan terms and short buying cycles can create a toxic alloy.

“It can catch up on you,” Jominy says “You can only roll over so many (outstanding loans)” before a consumer is seriously upside down, with the outstanding amount of a loan exceeding the vehicle’s value.

Some consumers are willing to take the risk. They will reenter the market “when they want to reenter the market,” Houston says.