Pricing Strategies in Consumer and Auto Lending

Where we are today and where we need to be

Today's landscape of consumer and auto lending is increasingly influenced by heightened margin pressures and rising loan risk due to increased delinquencies and declining affordability. Additionally, lenders must navigate a complex matrix of consumer behavior and competitive shifts, as well as technological advancements to foster sustainable growth. With high interest rates shaping the sector, understanding how your loan pricing strategies stack up against the competition is essential.

To help you stay ahead, Earnix commissioned independent market research aimed at discovering key trends in how consumer loans are priced and sold in today’s markets.

Between December 2023 and June 2024, Gatepoint Research invited selected executives from consumer lending institutions, banks, and auto finance captives in the U.S. to participate in a survey called "Pricing Strategies in Consumer Lending”.

Among other topics, the research was aimed at discovering:

• Market factors they consider when setting their loan prices

• How long it takes lenders to deploy updated prices

• The most critical capabilities and functions in a pricing analytics solution

Some interesting insights have been uncovered in this research.

Limited use of forecasting models. Although 2/3 of lenders have invested in some form of advanced analytics for risk-based pricing, only 20%-30% report using demand or price sensitivity models in their pricing decisions, indicating a lot of potential for embedding a better analytical understanding of customer behavior in pricing decisions.

Real-time / fast rate updates practices are yet to enter the mainstream. Over 1/3 of respondents take a week or longer to update their rates, lagging the rest of the industry. This results in a lost competitive advantage and an increase in the potential of writing unprofitable loans. There is a lot of potential for efficiency improvement when deploying new rates to the market.

Compliance and Loan Profitability keep lenders up at night (no surprise here). Dealing with compliance issues (46%) and ensuring loan profitability (44%) are the top challenges when pricing personal or auto loans/leases.

Lenders want to optimize for profitability and forecast it right. The most critical capability in a pricing analytics solution is pricing optimization (53%). Forecasting models (40%) and real-time pricing capabilities (37%) round out the top three.

We are still observing spreadsheets instead of pricing analytics software! While many lenders surveyed reported using some sort of pricing analytics solutions, there is still a fair number of lenders using homegrown systems, spreadsheets, or nothing at all to help them evaluate, visualize, and define their pricing strategies. 

The current state of affairs clearly calls for increased use of analytics and automation in the consumer lending space.  A shift has happened in the market that is forcing lenders to rethink their pricing strategies to achieve their overall organizational objectives. To put it another way, what can lenders do to:

Hit their spread, market share, and volume goals …

Without pricing too low to attract unwanted risk …

Or too high to further reduce their potential addressable market?

The answer lies in both technological and strategic shifts. Technology plays a vital role: powerful pricing solutions featuring advanced data analytics and artificial intelligence can help lenders make data-driven decisions faster. Additionally, agile pricing operations can help break the overall project into smaller tasks and start with small changes that bring powerful results.

As you are reviewing the trends in pricing analytics for consumer and auto lending, you are likely to ask yourself what the next steps are for YOUR organization. Here is the list of recommendations from Earnix that are likely to offer you the most immediate and visible improvements:

• Predictive modeling

• Advanced analytics

• Agile pricing operation

• Real-time pricing capabilities

• LOS integration

• AI-based architecture

• Built-in governance and regulatory compliance

More survey results and our recommendations for transforming your approach to loan pricing are discussed in this eBook “Pricing Strategies in Consumer and Auto Lending”.