When it comes to paying bills, some people have a million excuses (both valid and invalid) for skirting their obligations. Unfortunately, lenders constantly deal with borrowers' excuses when it comes ...
The auto loan industry is massive and chances are that if you are a financial institution, you are also in the auto loan lending game. As a lender, knowing ways to maximize your automotive financing portfolio and extending loans to qualified borrowers is of the utmost importance. Having a solid pulse on the auto finance market can help increase your financial institution’s auto loan portfolio.
Here is a brief summary of Experian’s State of the Automotive Finance Market report from Q2 of 2019:
Delinquency trends remain stable
While auto loans can offer profitability for a financial institution, there are also some downfalls and risk when it comes to the lending industry. In recent years, the auto-loan industry has seen a rise in delinquencies. And, of course, this is never a good thing for financial institutions.
The rise in auto loan delinquencies remained relatively flat during the second quarter of 2019. We saw 30 day delinquencies fall very slightly from 1.19% in the second quarter of 2018 to 1.14% this year. 60 day delinquencies remained stable, barely shifting from 0.26% in 2018 to 0.25% in Q2 of 2019.
Credit scores increase for new financing
Since the Great Recession, many Americans that suffered damage to their financial standing have since worked hard to rebuild their credit worthiness. Credit scores have increased year-over-year, rising from 711 for new auto loans in Q2 of 2015 to 717 this year. The credit score associated with used auto loans also increased from 645 to 656 during the same time period.
Average new loan amount remains over $32k
According to Kelly Blue Book, average new car prices have been rising by 2% year-over-year. The average new car loan reflects this, as it remained over $32,000 for the second quarter of this year.
Record highs in used loan amounts and payments
Amounts and payments for used loans reached record highs—close to $20,000 across all dealer types.
Terms rise across all loan and risk types to reach record highs
One consequence of the rise in auto prices in the 21st>century has been longer terms of repayment on auto loans. More expensive vehicles today are often financed over seven years!
The average loan term for a nonprime buyer of a new car reached a record high of 73.21 months. Given that longer loan terms are associated with higher rates of delinquency, make sure to weigh the increased chance of delinquency when extending longer loan offers.
Payments continue to increase and used payments reaches record highs
Average monthly payments on used cars reached record highs in Q2, up around $15 from this time last year. For nonprime borrowers, payments for new cars are up $32 year-over-year.
With these trends in higher payments and longer terms, your financial institution may want to prepare for rising delinquencies.
Read more here: On the Road with Rising Auto Delinquencies
Once a consumer falls victim to auto debt, they tend to keep repeating the same vicious cycle. Again, this cycle leads to default and delinquency for you and your borrower. AddingMajor Mechanical Protection Insurance (MMP), also known as an extended warranty, to your product lineup and extending this option to your borrowers is a mutually beneficial way to help ensure that your borrowers’ auto loans don’t become delinquent due to the cost of vehicle repairs.
If a borrower, especially one with a long-term auto loan, were to experience a total loss, it could potentially cause financial hardship. Programs that offer Guaranteed Asset Protection (GAP)could step in and cover the remaining balance that an insurance carrier would not cover. Adding this product to your auto lending program would protect your borrowers by offering coverage for both the balance of their auto loan as well as the depreciation of the vehicle in case of a total loss.
It seems clear that the demand for lengthier and more robust auto loans is on the rise. As a financial institution, you must properly mitigate the added risk to protect yourself and your borrowers.
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