According to a report from the second quarter of 2019 from the Federal Reserve Bank of New York, US subprime loans are going delinquent at rates unseen since the Great Recession. Auto loan delinquencies that are ninety or more days past due increased 47 basis points year-over-year to 4.64% ($60.2 billion) of all outstanding auto loans and leases. 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, so unemployment is not a factor in the recent jump in delinquencies. Tax reforms offer a further boost to the economy. 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.
While vehicle sales are slowing, auto loan debt continues to grow. The same report shows year-on-year outstanding balances of auto loans and leases reaching nearly $1.25 trillion during the same time period, an increase of 4.8% ($59 billion) from a year ago. During the past three years, consumers have continued to purchase new vehicles, but not at the same rate as in the first half of the decade. Demographic trends explain some of this. Younger professionals are flocking to urban centers where public transportation and ridesharing are often preferred means of transport. Within this same group, high student loan debt also discourages these same consumers from vehicle ownership. With slower sales and an increase in auto loan default, statistics show the trend may continue well into 2021.
Delinquencies May Become Auto Loan Default Statistics
Yet who’s responsible for the growth in auto loan debt and consequent delinquencies? Banks and credit unions tend to be historically conservative when 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 less conservative than banks and credit unions have used the current economic growth rate to rationalize looser credit policies. As a result, delinquency rates from subprime loans written by 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 with improved financial positions resulting from better employment opportunities who are still rated as subprime may not qualify for a new vehicle but likely qualify for a more affordable used vehicle. This is an attractive market segment for dealers and finance companies, generating higher profits on used vehicles as interest rates on these loans are also higher.
There are indications that the slow economic recovery in the US from the Great Recession may be coming to an end. If delinquencies are already trending toward levels not seen for many years, what further impact will an economic downturn have on auto loan default statistics?
Finance companies focusing on subprime borrowers will face the greatest risk should the economy stagnate. Historically, when compared across all credit scores, their delinquency rates are higher than those of credit unions and banks.
How to Avoid Becoming an Auto Loan Default Statistic in 2020
No lender, bank, credit union, or other lender is immune to a market decline. The impact of such a downturn would increase the probability of delinquencies, which can quickly become defaults. Yet when it comes to an auto loan, default statistics can be mitigated by a lender looking to reduce this risk. Lenders can withstand economic downturns by:
- Making well-reasoned lending decisions regarding an applicant’s financial position, supported by sources of alternative credit data and trended credit data that provide more detailed and current applicant information.
- Removing inconsistency from loan decisions by removing individual underwriters from the process and translating credit policies and practices into decision rules that consistently execute repeatable comparisons, evaluations, tasks, and processes.
- Employing analytics to identify fraudulent applications that are likely to become delinquent and default, as fraud often increases in challenging economic times.
Advances in accessible consumer data, configurable decision rules, and machine learning help lenders identify misrepresented applicant information to reduce risk. For the historically conservative banks and credit unions, these capabilities further improve their ability to make sound lending decisions. For other lenders, these technologies are critical to reducing their exposure to loans likely to become delinquent.
With the shadow of economic uncertainty for the rest of this year, as well as a big question mark concerning the economy going into 2020, lenders need to adjust their credit policies and practices to avoid contributing to higher auto loan default statistics.
defi SOLUTIONS offers solutions for a lender’s complete loan or lease lifecycle. Partnering with captives, banks, credit unions, and finance companies, defi’s market-leading solution helps lenders exceed borrower expectations. From digital engagement through the complete lending process, defi sets new standards for flexibility, configurability, and scalability in originations, servicing, and managed servicing. defi SOLUTIONS has the backing of Warburg Pincus, Bain Capital Ventures, and Fiserv. For more information on auto loan default statistics, please visit www.defisolutions.com.