New car loans, vehicle upgrades, import availability and the impact of lower interest rates are all factors that affect if and when a client decides to pay off their auto loan.
Consumer behaviours are adapting to these changes in the Canadian auto market which impacts lenders and dealers. Here’s what you need to know about auto early payouts and how it can potentially affect your business.
Consumers close auto loans for multiple reasons. Some of these reasons include paying off the loan early to be debt free or avoid paying interest, selling their car to acquire a new one, or closing the loan to get another one with a better interest rate. There are differences in behaviour between the older, high score consumers and younger high score consumers. Recent consumer credit trends show that older, high scoring consumers tend to pay off their auto loans for good, while younger consumers are more likely to apply for a new car loan by closing an old loan early.
The reason behind this difference is that older consumers have more cash flow and liquidity. High score consumers take the most advantage of early payout as they have more options and flexibility to get a desired deal on loan financing and interest rate. This is due to their longer credit history, building up the confidence of lenders for consumer repayment, which in turn drives up the early payout rate. Younger consumers, however, are more likely to upgrade and switch dealers in search for a better deal.
There was a rise in auto early payouts during the pandemic with an increase in auto loan closures earlier than the term. This was particularly noticeable early in the pandemic between mid-2020 to 2021. The lockdowns due to COVID-19 closures reduced consumer spending and increased savings for many households.
The government support programs helped increase disposable income of many consumers which they leveraged to pay off loans or upgrade vehicles. These factors highlight how the credit market is becoming increasingly competitive. If lenders want to ensure clients retain their auto loan for the full term, competitive rates need to be offered to consumers.
The central driving force behind consumers switching lenders is the financing interest rate. Consumers want to reduce their monthly cash outflows and payment obligations. Our recent credit trends data shows over 50% of consumers who paid off their loan before the full term, got a new loan within one year of closing the loan.
Approximately 60% of consumers who terminated their auto loan earlier than the full term, switched to a more expensive vehicle and therefore applied for a higher value auto loan. With this in mind, it’s a good retention strategy to check-in with consumers who have potential to upgrade their vehicle and apply for a new auto loan with you.
We want to help Canadians live their financial best. To learn more about how understanding our automotive trends can help you adapt to consumer behaviour, please contact your Equifax Account Representative. You can also reach us directly at 1-855-233-9226 and follow us on Twitter and LinkedIn.
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