How worried should you be about current auto lending market and delinquency trends? Subprime auto loan delinquencies have been on the rise since 2011. They may have stabilized a bit, but recent news tells us that auto lenders need to keep monitoring credit policies and portfolio performance to avoid contributing to the trend.
In June 2018, the Wall Street Journal article “Auto Lenders Ramp up Risk to Win More Customers” mentioned how lenders were using longer repayment periods (more than five years) and higher interest rates to boost profits without taking on additional risk. The average repayment period in 2018 for a new car is 69 months, with an average monthly loan payment of $520.
A July 2018 Credit Union Insights article “Prepare your collections operation: The rise in auto loan delinquencies” lays out the underlying factors that contribute to an increased delinquency rate.
- Higher interest rates that increase total loan cost
- Consumers buying higher-ticket vehicles (mainly light trucks and SUVs)
- Loan terms of 72 to 84 months, with statistical evidence that longer loan terms raise delinquency probability
- Student loans and mortgage debt that make it tougher to afford shorter-term loans
The article advises lenders to head off delinquencies with proactive communications and counseling. That should include identifying the reason(s) of delinquency and careful assessment of the borrower’s ability to repay. Lenders are encouraged to have a loan modification program in place to avoid defaults and repossession costs.
A recent Auto Finance News article provides more pointed evidence of auto loan delinquency trends: A 28% year over year increase in late-stage delinquencies through June 2018, with a spike in 120 days-past-due at American Honda Finance Corporation.
Do Delinquency Trends Matter?
How you interpret and respond to these data and trends depends on your current credit policies and portfolio performance. If you’ve been conservative in past years, you’re probably taking this news in stride. If you’ve adopted more liberal credit policies in an effort to grow, it may be time to reevaluate those policies.
Regardless of how you perceive current auto loan delinquency trends or anticipate future trends, two strategies can keep you from contributing to growth in delinquency trends. First: Improve the quality of your lending decisions. Second: Proactively address delinquencies.
Better Quality Consumer Data Supports Better Quality Lending Decisions
The more information available to make a decision, the better the quality of your decision. FICO scores may be all you need to confidently grant credit to very good and exceptional applicants. However, lending decisions made exclusively on FICO scores in the good to very poor range take on increasing risk as score decline.
A better way to evaluate good to very poor applicants is by combining credit bureau data with alternative credit data that provides additional dimensions of an applicant’s financial position. Alternative credit data can include employment records, income statements, utility, rental, and cell phone payment records, and real estate holdings and liens. Combined with traditional credit bureau scores, alternative credit data gives lenders a more substantial base of information on which to make lending decisions.
Proactively Address Delinquencies to Avoid Defaults
Lenders need to anticipate inevitable delinquencies and have established strategies and processes to minimize their impact in advance. Automation capabilities in loan servicing solutions can alert lenders to delinquent payments and contact the borrower in accordance with state debt collection regulations. Automated communications can be through email, text, voice, or print, with a digital copy retained as part of the borrower’s lending record.
Automation helps servicing agents manage status changes efficiently and apply rules to direct the flow based upon account status. The benefit is a consistent and auditable process for managing delinquencies.
Although automation provides timely and efficient notification of delinquencies, as recommended above, lenders also need to counsel borrowers regarding options to minimize the risk of default. Here, automation is no substitute for the professional guidance of an experienced servicing agent.
Use Analytics to Keep Refining Your Credit Policies
The data that you use to evaluate applicant creditworthiness, the deals you make, and the performance of each loan in your portfolio all provide a wealth of information that can be used to evaluate and refine your credit policies. Modern lending solutions capture, create and maintain this data from origination through servicing. Regular data analysis lets lenders make continual adjustments to their credit policies with the goal of minimizing delinquencies and maximizing profits. Analytics applied to your loan portfolio can:
- Identify borrower attributes that closely correlate with delinquencies;
- Evaluate sources, interest rates, loan term, collateral, LTV, PTI, and DTI and their correlation with delinquencies for each of the market segments in your portfolio;
- Identify underwriters whose overrides lead to higher than average delinquency rates; and
- Determine if there is a correlation between specific originating dealers and delinquency rates.
Auto lending analytics should not require users to have any special technical or database skills. A modern lending solution offers fully-integrated analytics that let business users easily configure reports to evaluate portfolio performance and analyze nearly every other aspect of the lending lifecycle.
Stay Profitable Through All Auto Loan Market Changes
Even when auto loan delinquencies rise overall, savvy lenders can stay profitable. Modern lending solutions that combine traditional credit bureau data with alternative credit data lets lenders reduce delinquency risks by making better quality lending decisions. Lending software uses automation to monitor delinquencies and apply a consistent process for working with borrowers to mitigate loss—no worrying required.
Getting Started
defi SOLUTIONS develops, delivers, and supports loan origination, servicing and analytics solutions to reduce risk and improve lending efficiency. With 20+ years of experience, we welcome the opportunity to discuss your needs. Contact our team today or register for a brief demo to see the positive impact our solutions deliver.
