Garnet Capital Advisors Blog

Consumer spending and borrowing is up, offering more opportunities for banks to tap into.

Banks that are currently focused predominantly on the commercial loan industry or large-scale business clients might want to reconsider their loan portfolio assets.

Consumer confidence has been on the uptick over the recent past, as the labor market continues to strengthen and wages are on the rise. No longer is taking out a high-risk loan the norm these days, after consumers learned their lesson the hard way about over-leveraging and racking up serious debt in order to make big-ticket purchases.

The consumer of today is in a much better and stronger financial position. Heightened confidence in consumer spending coupled with an increased focus on paying down debt as opposed to mounting means today's consumer has certainly made plenty of headway from the financial crisis eight years ago.

And it's for this reason that banks should be taking a closer look at consumer lending, which could be the perfect opportunity to make their loan portfolios as profitable as ever.

In fact, plenty of banks across the US have already been tapping into consumer lending activities, which points to a loosening of the consumer lending environment.

Auto Loans Offer Real Profit Potential For Banks as Used Car Prices Will Likely Fall This Year

An increase in consumer spending confidence paired with dipping used car sale prices could equal a prime opportunity for banks to expand their auto loan segment.

From 2013 to 2014, new car leases were through the roof in the US given the high prices for used vehicles. In that environment, it made more sense for many consumers to lease rather than make a used-car purchase.

But with these leases expiring in 2016, car dealers will be seeing a huge influx of off-leases converting into used car sales. And the more used vehicles on the market, the lower we can expect prices to be. It's a simple formula of supply versus demand.

According to the Power Information Network (PIN) from J.D. Power, 3.5 million new automobiles were leased in 2014 in the US. From 2007 to 2014, residual value of these automobiles significantly improved. The average vehicle coming off lease increased in retained value to 54.4 percent over the past seven years, up 9.4 percent from 2007.

And with the recent dramatic increase in supply of used vehicles, prices are increasingly being pushed down. Anyone looking for a good deal on a gently-used vehicle in excellent condition will certainly find one rather easily in 2016.

Leasing's Effect on the Used-Car Market

Lease maturities are expected to grow by 4 percent this year, leading to a steep increase - 33 percent from 2015 - in off-lease vehicles. And such increases are expected to continue well into 2018.


Auto lenders might want to consider selling their non-performing loans before prices decline.

As off-lease vehicles increasingly make it to the used-vehicle market, prices will drop in response to such significant supply. In fact, it's anticipated that the prices of used vehicles with retained value will drop 7.3 percent in 2018 from 2015.

Consumers Are More Willing to Spend and Borrow

Amid an improving labor market and economy, as well as dramatically lowered energy prices as of late, consumers are more apt to spend their hard-earned dollar, and borrow in order to make those larger purchases that their bank accounts can't necessarily cover in full.

A boost in consumer spending and borrowing is a good thing for the overall US economy because such spending accounts for nearly 70 percent of the Gross Domestic Product (GDP). And banks' increased readiness to lend to consumers can provide a boost not only to the average US household, but also to banks' loan portfolios.

Strong Mortgage Market Despite Continued Tight Credit Standards

Not only is now a great time to buy a used vehicle, it's also as good a time as ever for consumers to get approved for a home loan, considering the fact that current mortgage rates have dropped and lower rates mean that borrowers can buy more house.

During the last three months of 2015, an increasing number of mortgage lenders eased their loan approval standards compared to those that increased them. That marks the seventh quarter in a row for such an occurrence to take place, and explains why more consumers are being approved for home loans now compared to the recent past.

With more effective lending practices and models, along with the strengthening housing market in the US, lenders are more confident in easing their lending standards and offering loans to borrowers with less-than-perfect credit.

The Federal Reserve's recent quarterly survey with its member banks regarding the current lending environment shows that prime mortgage borrowers - those with credit scores of 740 or higher and with lower-than-average debt-to-income ratios - are finding it easier to get approved for mortgages these days.

In fact, 18 percent of banks claim to have eased their mortgage loan standards last quarter. Not only that, but seven out of 10 purchase mortgage applications closed last quarter - the highest percentage since such statistics have been tracked by Ellie Mae.

Clearly, getting a mortgage may be easier these days for the average consumer.

Loan Portfolio Sales and Acquisitions With Garnet Capital

Whether it's an auto loan or a mortgage, lending to a well-informed and financially-responsible consumer could be the way for banks to go to pad their bottom line. At Garnet Capital, we can provide you with the necessary insight and connect you with the right partners to successfully add various consumer loans to your balance sheet.

Browse our white papers today to learn more.