Auto loan delinquencies are rising faster than any other category, and last year, outstanding auto loans in the U.S. reached over $1 trillion. This increase delinquencies is so high that the New York Federal Reserve Bank reports that auto loans have reached levels not seen in eight years and the 2016 auto loan totals were the greatest number they’ve seen in their entire 18-year history of data collection.
What’s causing this rise in delinquencies? There are a few major factors in play.
Longer loan terms are a big issue adding to delinquencies and Experian reports that 73-76 month loans have the highest delinquency rates. Additionally, increased interest rates and higher-than-average monthly payments on auto loans, alongside a rise in unemployment rates are also leading to an increase in delinquencies.
Automotive OEMs, dealerships and F&I managers need to stay on top of this issue and revaluate the way they are handling auto sales and loans in order to combat the growing delinquency rate.
Don’t Just Get the Deal, Make the Right Deal
When it comes to auto loans, doing whatever it takes to get the buyer to sign a deal could have significant negative financial implications for the dealership and the customer down the road.
For example, a dealer may ask an auto loan lender to extend the loan just a couple months in order to keep monthly payments low enough for the customer. However, that could create more negative equity for the borrower and result in a charge-off.
Additionally, the New York Federal Reserve Bank also reported that an increase in subprime lending—which can be more profitable for lenders due to higher interest rates—has recently lead to this increase in the number of customers falling behind on their car loans.
When creating auto loans, there are some important factors dealerships and F&I managers need to keep top of mind.
Reduce Delinquencies Among Your Auto Loan Customers
First, it’s important to be aware of the trends surrounding this increase in delinquencies:
- The rate of delinquencies on used vehicle loans is almost double to the rate of new vehicle loans.
- Long-term loans tend to cause more delinquencies.
- Customers with longer credit histories are less likely to default on their loan.
- Loans that start with a higher loan-to-value ratio than the industry average result in more delinquencies.
Similarly, it’s also important to know your customers and understand their financial status and level of knowledge when it comes to auto loans. F&I managers should be able to gauge whether a customer is familiar with loan rates or not, if they are responsible when it comes to payments or if have a hard time building their credit. Based on each individual consumer’s needs, you should know which lenders can offer shorter terms or lower rates; or allow for more points for dealer reserve or more advance for backend products.
Understanding the trends in auto loan delinquencies and the customers you are selling to can help you manage your loan portfolio, which could reduce credit losses by 35 percent. The two critical things to make sure of are that your customer has an affordable monthly payment and that the auto loan term isn’t too long. Additionally, you can recommend adding on a vehicle service contract (VSC) in order to help the customer protect their investment.
If you come across a customer experiencing a financial set back because they are in an upside down loan, their car lost value or they lost their job, you can encourage them to look into getting a loan modification, rather than letting their auto loan default. Whatever type of auto loan customer you’re dealing with, you should always be equipped with advice, options and solutions that can help them make payments on time and avoid getting their vehicle repossessed.
Budco Financial delivers no-interest or low-interest payment plan solutions to help OEM’s and dealerships reduce bad debt. For more automotive industry trends and to learn more about our offering, follow Budco Financial on LinkedIn and Twitter.