In recent years, the US has experienced a growing economy, low interest rates, and a downward unemployment trend. Auto lending, on the other hand, has surprised many by marching in the opposite direction. Loan originations are declining. Balance growth is slowing. And auto loan delinquency trends and data suggest that delinquencies have been climbing since 2014.
This upward trend has not gone unnoticed. Lenders have become increasingly cautious in assuming risk, particularly in the prime and subprime categories. Auto loan delinquencies are an unavoidable aspect of the lending industry, but lenders have begun to tighten underwriting criteria in an effort to reduce their frequency.
By identifying potential delinquencies earlier in the qualification process, lenders may be able to lessen the negative impact on their portfolios. And by analyzing the data underlying delinquency trends, auto loan originators can adopt strategies to turn the tide in their favor.
Understanding Auto Loan Delinquency Trends and Data Impacting Lenders in 2018
Despite continued caution throughout the auto lending industry, delinquency rate projections for 2018 indicate a slight increase over the previous year.
Auto Loan Delinquency Trends and Data 2014-2018
|Delinquency Rate (60+ Days Past Due)||Average Debt Per Borrower|
These key factors underlie current auto loan delinquency trends:
- Competitive risk: Willingness by lenders to assume higher risk in a competitive market
- Lengthy loans: Lenders granting long-term loans of 72 months or more
- Secondary markets: Growth in the secondary auto market favored by subprime borrowers
- High interest rates: At first glance, high interest rates often seem manageable to a subprime borrower—until their life circumstances change
The question that the auto loan industry must consider is: How can lenders profitably navigate this market, identify opportunities to lower delinquency risk, and improve overall loan portfolio performance and profit?
3 Strategies to Reverse Course on Negative Auto Loan Delinquency Trends
Let’s consider three potential strategies for auto lenders coping with increasing delinquency rates. Each strategy utilizes analytics, i.e. the application of statistical models and algorithms by in-house experts or outside consultants to identify data trends. Also crucial to these strategies is access to new sources of economic and consumer data that provides greater detail and accuracy regarding identity, bankruptcy, risk management, employment, fraud, and credit. These are available to lenders via integration with their loan management systems, loan origination software, or are accessible by way of a subscription service.
The three best strategies to combat current auto loan delinquency trends are:
- Better borrower qualification methods: Include additional data in the origination process for better borrower qualification
- Proactively identify potential delinquencies: Proactively analyze subprime borrowers to effectively identify potential future delinquencies
- Identify future trends in the present: Analyze portfolio segments to uncover trends and correlations that can support efforts to avoid risk
Better Borrower Qualification
Experienced auto lenders intuitively understand the characteristics that qualify (or disqualify) borrowers—and use this information to appropriately structure loans. Your current loan origination system (LOS) has likely incorporated some aspects of this knowledge to facilitate a consistent process for application evaluations and decisions. However, the time and cost involved in modifying legacy LOS systems limits the ability of lenders to benefit from new technologies that can facilitate better borrower qualification, such as cloud-based integration with consumer and economic data sources.
Loan decisioning is greatly enhanced when up-to-date sources of consumer and economic data are pre-integrated into a loan origination and management system. Data sources like credit bureaus and risk management programs, among others, provide a more detailed context for evaluating loan applications. In addition to attributes typically used to evaluate borrowers, they include additional dimensions of information to more thoroughly verify loan applicants, particularly those who may fall into the high-risk category.
During loan origination, these data sources allow you to:
- Combine a predicted fraud score (based on applicant analysis and compared with statistical profiles of similar applicants) and the FICO® Auto Score to give a better measure of risk than a credit score alone
- Confidently verify the applicant’s identity to avoid fraudulent loans
- Determine if a dealer has a tendency to attract high-risk customers, and decline applications from these dealers
A system that allows lenders to easily access relevant consumer data sources during the loan origination processes can reduce exposure to delinquencies through better qualification of applicants.
In each of the examples above, pre-integrated access to additional sources of current, accurate data improves the quality and confidence of your decisions. A system that allows lenders to easily access relevant consumer data sources during the loan origination processes can reduce exposure to delinquencies through better qualification of applicants.
Proactively Prevent Delinquencies
The loan origination process is the first level of defense against risky loans. Inevitably, though, a small percentage of loans will acquire a higher degree of risk during the loan period as a result of unexpected personal or economic factors affecting the borrower. Rather than accept this type of delinquency as given, some lenders are proactively identifying borrowers with pending risk by employing analytics.
Analytics shows strong evidence that certain events can indicate a borrower’s inability to make payments, such as:
- Change of address
- Change of employment
- New phone number
While seemingly insignificant, they could be indicators of significant life changes—and early predictors of financial stress. To address this possibility, lenders have begun using alternative credit data from vendors like FactorTrust to access current information about borrowers with late payments. By proactively identifying and contacting the borrower, the lender can offer appropriate options, adjust terms, or make other accommodations in an effort to avoid delinquency.
…lenders who have adopted this strategy have been able to reduce the number of delinquencies and the associated expenses.
Of course this won’t remedy all delinquency concerns. However, lenders who have adopted this strategy have been able to reduce the number of delinquencies and the associated expenses. Additional data concerning a borrower’s past and current financial health can advise lenders throughout the loan lifecycle and are a key feature of modern loan management systems.
Identify Trends and Correlations via Analytics
There’s a unique wealth of information in your loan portfolio. You can review the past, ponder the present, and even foresee the future—if you have the right analytics tools.
With analysis of your portfolio, you can uncover unique factors that positively and negatively influence its performance, both at a macro level and at a micro level. For example, you can:
- Pinpoint trends: Analyze a portfolio segment or focus on a single account to discover correlations among factors such as age, occupation, credit history, credit score, loan-to-value (LTV), make, and model.
- Improve loan structures: Assess factors that influence loan performance, as well as identify and optimize them to offer loans that have the greatest impact on profit.
- Identify early warning signs: Minimize risk by analyzing payment histories of the subprime segment of your portfolio to identify the borrower characteristics that are early-warning delinquency indicators.
- Spot growth opportunities: Apply statistical models and aggregated data sets developed by industry specialists to compare portfolio segments against these data to determine growth opportunities.
Frequent analysis will allow you to identify nascent trends and apply the findings to continually improve portfolio performance. Portfolio analysis will be critical for lenders who want to remain competitive in 2018 and beyond.
Defending Against Delinquencies in 2018
Declining auto industry sales, increasing interest rates, and a continuation of established delinquency trends in 2018 create a challenging environment for lenders compared to market growth of previous years. However, by applying analytics throughout the loan lifecycle, lenders gain a more detailed and accurate understanding of borrowers and behaviors, as well as market conditions.
This detailed level of understanding improves the quality of decisions made in all phases of loan management. For this reason, analytics and detailed consumer data should be integral components of a lender’s tools. With these in their toolbelt, lenders can better defend against delinquencies—and minimize risk in 2018 and beyond.
defi SOLUTIONS loan origination and analytics software experts welcome the opportunity to discuss how we can help reduce risk exposure in your portfolio. We are professional lending process problem solvers. Take the first step toward reducing the risk of delinquency by contacting our team today or registering for a demo of defi LOS.
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