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Revenue Diversification: The Antidote to Today’s Low-Yield Loan Interest Rates
It's no secret that auto loan yields are at low levels due to industry-wide low interest rates. According to the NCUA, the national average for a new vehicle loan with a 48-month term was 2.58%, as of December 2015. However, Forbes recently found a financial institution offering vehicle loans for 0.74%. While there has been some news on interest rates rising, the reality is that today’s competitive marketplace is clearly keeping rates in a low holding pattern.
The good news is that loan origination volumes are increasing in this low-interest-rate environment. The bad news, of course, is that financial institutions are experiencing low overall revenue yields. In the worst-case scenarios, financial institutions are wondering how they can continue to survive in this market.
However, many financial institutions have already discovered the key to keeping their revenue on track. They are diversifying their income stream with fee-based products. In fact, in a marketplace with ongoing large and small financial swings, the best long-term strategy is income diversification.
This philosophy relates to the old adage: Don’t put all of your eggs in one basket. With the right mix of interest-earning and fee-based products, financial institutions gain the benefits of both worlds.
Diversifying With Auto Loan Protection Products
To counter shrinking interest rates, a growing number of financial institutions have found a dependable new revenue stream in products that complement vehicle loans. Two of the most popular products are Guaranteed Asset Protection (GAP) and Major Mechanical Protection (MMP).
These products give financial institutions new fee-based income opportunities, as well as protection for vehicle loan collateral. Both supplementary loan products can be offered to borrowers at the time of loan origination, giving them the opportunity for greater vehicle protection during the financing process.
GAP coverage gives your borrowers a safety net if their vehicles are ever totaled or stolen and not recovered, by covering the difference between their insurance company’s payout and, in most cases, the actual cost of replacing their vehicle.
MMP is a vehicle warranty product that extends the terms and conditions of vehicle mechanical protection beyond the manufacturer’s standard warranty. This protects consumers against the rising costs associated with most unexpected mechanical breakdowns. MMP provides coverage for most major repairs, including the engine, transmission, front- and rear-wheel drives, front suspension, steering, brakes, electrical, and air conditioning.
Multiple Benefits for Lenders and Borrowers
Vehicle protection products offer financial institutions and their borrowers several benefits, creating the quintessential win-win scenario.
Lender benefits include:
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Adding additional and dependable new revenue streams
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Increasing member loyalty from value-added products
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Lowering the risk of vehicle loan defaults after accidents
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Protecting their vehicle collateral from mechanical damage
Borrower benefits include:
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Reducing or eliminating out-of-pocket expense for the remaining loan balance in the event of a total vehicle loss or theft
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Remaining in good financial standing with their lender and protecting their credit rating
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Gaining peace-of-mind from knowing their loans will be covered in the event of a total loss or theft
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Enjoying the ability to purchase a new vehicle sooner after an accident
GAP and MMP coverage also prevent lose-lose outcomes in two scenarios. First, in the event of a complete vehicle loss, many borrowers cannot afford to pay the difference between their vehicle's value and the insurance reimbursement amount. As a result, they often replace their vehicle with one of lesser value. With GAP coverage, they could afford an even trade. Second, when borrowers can’t afford to repair a vehicle’s mechanical issues, they often let it get worse, further reducing the value of the vehicle. MMP could help avoid that.
When financial institutions effectively market point of sale products like GAP and MMP, the income generated by these products even has the potential to surpass that of interest from the loan, in some cases.
Rather than continue to suffer in today’s low-rate environment—with its thin margins, low overall yields, and low income potential—auto lenders can diversify their products with added vehicle protection and gain new fee-based income opportunities.
Learn how SWBC can help you offset low auto interest yields. Click to watch our video.
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LendingRonni Martinez
Ronni Martinez joined SWBC in 1998 and is currently the Vice-President of Product Management for SWBC’s Financial Institution Group.
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