Every year, lenders everywhere repeat the familiar ritual of evaluation, estimation, and determination, deciding which lines of business they want to devote their time and capital to.
Recreational vehicles (RVs) have blossomed into just such an industry over the last decade, seeing a rise in the large dealer group model plus an influx of business leaders and top talent from other industries.
What this means is the RV industry is now enjoying many of the benefits that have supported the auto industry for years, such as:
- Strong dealer associations
- A large auction network
- Predictable and stable used product values
- Consistent commercial and retail financing
In addition, a combination of more baby boomers retiring and an explosion in younger first-time buyers is driving RVs to new heights of popularity with consumers. Consider that millennials, now the demographic with the most buying power,1 place a premium on experiences outside the routines of daily life, particularly outdoor activities (including camping, tailgating at sporting events, and weekend getaways, to name a few).
In the US, 75 million households actively camp,2 while the National Parks Service reported overnight visits in tents or RVs in 2017 hit their highest level in 20 years.
Finally, manufacturing discipline has led to consistent investment in product development and improvement, creating longer-lasting, lower-maintenance vehicles that retain their value – a critical development for a purchase that’s more akin in scope to a mortgage than an auto loan.
Market confidence has driven dealerships to invest in the technology and infrastructure necessary to improve their customers’ experience while efficiently running their businesses, making them increasingly attractive financing partners.
So, how do smart lenders leverage this opportunity while minimizing risk?
A Smart Target
To answer that question, it’s worthwhile to think about why lenders have continued to serve the RV market. We might accept that industry growth, a bullish outlook, and private investment have attracted several national and regional lenders to the abundant financing opportunities present in the RV industry, but what is it that makes them stay?
One major factor is the lack of subvented rates and terms, providing lenders with a more level playing field. This means it’s more attainable to structure loans that hedge against risk and produce target yields. It also means lenders are able to command higher interest rates and down payments while avoiding adverse selection.
Of course, the success or failure of any financing partnership ultimately rides on the nature of the industry’s consumers, so let’s consider the type of people making RV purchases. Overall, RV customers have a higher net worth with more disposable income than the average customer engaged in a comparable transaction.3 Remember, a significant number of this demographic consists of retiring, financially secure baby boomers.
Plus, RV lenders have another advantage over their auto lender counterparts in that the increased loan size and discretionary nature of the purchase often means customers and dealers are more willing to provide proof of income and assets. This helps create a more thorough and disciplined underwriting process.
It’s also worth noting that the regulatory burdens of an RV loan are substantially lighter than a comparable investment, such as a standard mortgage loan. Those regulatory burdens are further alleviated by technological solutions available to lenders in the RV industry, such as web-based software that automates many of the tasks associated with indirect lending – receiving electronic credit applications from dealers, for example.
Those associated with the RV industry are choosing to increase their investment based on the performance of both their own portfolios and the market at large. This is no accident: A perfect convergence of factors, from demographic changes to product improvement to dealer innovation, has resulted in a surge in RV popularity that shows no signs of slowing down.
As the market matures and additional data leads us back again and again to this same conclusion, it may be time to revisit your strategy and decide if you’re ready to pursue this smart target.
1 The Next Brick
2 Kampgrounds of America