According to the New York Fed, US subprime loans are going delinquent at rates unseen since the Great Recession. Auto loan delinquencies 90 or greater days past due increased 47 basis points year-over-year to 4.64% ($60.2 billion) of all outstanding auto loans and leases in Q2, 2019. That’s baffling, considering the comparatively strong economic climate, record low unemployment, and many unfilled job openings. Ten million jobs were created during the last four years. Tax reforms further boosted the economy. Unemployment is not a factor in the recent jump in delinquencies. Nonetheless, this is a worrisome trend that will eventually be reflected in auto loan default statistics for the second half of 2019 and likely into 2020.
During the past three years, consumers have continued to purchase new vehicles, but not at the same growth rate as in the first half of the decade. Demographic trends are part of the story. Millennials are flocking to urban centers where public transportation and ridesharing are preferred. Student loan debt also motivates these consumers to forego vehicle ownership.
Although vehicle sales are slowing, auto loan debt continues to grow. According to the New York Fed, year over year outstanding balances of auto loans and leases reached $1.3 trillion,
in Q2 2019, an increase of 4.8% ($59 billion) from a year ago.
Delinquencies May Become Auto Loan Default Statistics
With the growth in auto loan debt and consequent delinquencies, who’s responsible? Banks and credit unions are historically conservative in writing subprime auto loans. Captive lenders are more aggressive. They’re motivated to sell new vehicles. Auto finance companies, particularly smaller lenders whose credit policies are not as conservative as banks and credit unions have used the economic growth to rationalize looser credit policies. As a result of these practices, the subprime delinquency rates banks and credit unions are typically less than half of those at auto finance companies. Although subprime loans account for approximately 21% of all auto loan originations, about 35% of auto finance companies’ loan balances are subprime.
Consumers improving their financial position as a result of better employment opportunities, but still rated as subprime may not qualify for a new vehicle, but likely qualify for a more affordable used vehicle. They are an attractive market segment for dealers and finance companies—higher profits on used vehicles and higher interest rates generate higher profits.
As of this writing, there are indications that the economic run of recent years may be coming to an end. If delinquencies are already trending toward levels not seen in years, what further impact will an economic stumble have on auto loan default statistics?
Finance companies with a significant focus on subprime borrowers face the greatest risk in the event of an economic downturn. Historically, their delinquency rates across all credit scores are higher compared to credit unions and banks.
How to Avoid Becoming an Auto Loan Default Statistic in 2020
No lender, bank, credit union, or finco is immune to the impact of a market decline and the potential for a subsequent increase in delinquencies that can quickly become defaults. There are, however, means for lenders to improve their ability to reduce the risk of contributing to a growth in auto loan default statistics.
- Make well-reasoned lending decisions regarding an applicant’s financial position supported by taking advantage of detailed and current applicant information available from alternative credit data, and trended credit data sources.
- Remove the inconsistency of decisions made by individual underwriters by translating credit policies and practices into decision rules that consistently execute repeatable comparisons, evaluations, tasks, and processes.
- Employ analytics to identify fraudulent applications (sure to increase in challenging economic times) that are almost certain to become delinquent, then default.
Advances in accessible consumer data, configurable decision rules, and machine learning that identifies misrepresented applicant information are helping lenders reduce risk. For historically conservative banks and credit unions, these capabilities can further improve their ability to confidently make sound lending decisions. For fincos, these technologies are critical in reducing their exposure to loans likely to become delinquent.
With economic uncertainty in the second half of 2019 and the economy of 2020 a big question mark, lenders need to adjust credit policies and practices to avoid contributing to auto loan default statistics.
defi SOLUTIONS’ loan origination and analytics software experts want to help improve the quality of your lending decisions. Take the first step toward reducing the risk of delinquencies that become defaults by contacting our team today or registering for a demo of defi LOS.
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