I’m sure you’ve seen the 1993 movie Groundhog Day starring Bill Murray. His weatherman character disparages his assignment to cover the annual groundhog event, only to wake up the next day…and the next day…realizing he is inexplicably reliving the same day over and over again. Filled with cynicism, Murray fails to “flip the script” on his predicament and must suffer the monotony.
A lender client shared a similar sentiment with me concerning the recent rise in defaults, bemoaning how auto loan volume, defaults, and delinquencies all follow the cycle of economic ups and downs. The economy tanks and auto loan volume goes down while defaults and delinquencies go up. The economy is on the upswing and auto loan volume goes up while defaults and delinquencies decrease. It’s the same old story every year.
With a plateau in vehicle sales and elevated auto loan defaults, everyone is wondering if after ten years of an expanding economy, we are on the tipping point to a down economy. But, let’s take a look at the numbers.
The Great Recession was tipped by mortgage defaults, not auto loans. However, the behavior has some similar undertones. Subprime borrowers are suddenly missing payments within a few months of the vehicle purchase. This reflects the early signs of the subprime mortgage crisis in late 2006 and early 2007.
Experts agree that the subprime auto loan market will not feel the same sweeping impact that came from the mortgage crisis. In fact, the entire auto loan market is less than $1 trillion compared to a mortgage market of more than $10 trillion at the time of the crisis.
In addition, the current economy appears more robust than it was in 2006/2007. Unemployment is hovering around four percent, gas prices are below $3, and interest rates are “relatively” low. But global economic factors still exist and seem even more precarious.
So where does that leave us? Car owners are increasingly falling behind on bigger loans with longer repayment terms made against depreciating assets. Subprime consumers are defaulting on loans at a higher rate than at the peak of the Great Recession. Annual loss rates on subprime loans have climbed to eight percent from five percent in 2013, according to Goldman Sachs. Investor interest in both prime and subprime auto bonds has prompted Wall Street to deliver $3 billion worth of subprime auto asset-backed securities so far in 2018, according to JPMorgan Chase & Co. data.
While Bill Murray’s character was chagrined to see Punxsutawney Phil’s shadow day after day, as a lender, you have the option to flip the script.
This doesn’t mean you should stop evaluating risk, planning for the future and strengthening defenses against defaults. But, it does mean to utilize out-of-the-box tactics in your strategy.
Lenders can break out of the Goundhog Day cycle with consumer protection products that protect their loan portfolios and differentiate their offerings with consumers. This means it could be possible to have consistent auto loan volume, defaults and delinquencies regardless of the economic cycle.
Consumer protection products have the potential to reduce risk by addressing the consumer’s ability to make their loan payments when life takes a turn. According to a recent report from the Board of Governors of the Federal Reserve System, in 2017, 40 percent of adults reported that they would struggle to pay a $400 emergency expense, like a vehicle repair. Whether it’s an unexpected mechanical repair or a life event, products like a VSC or vehicle return can help the consumer and the lender.
Everyone is running data models on risks, delinquencies, and defaults, getting up to speed on the credit history of those customers impacted, and proactively working with those customers to ensure future payments. These are important steps to take. Adding in consumer protection products only helps to further protect your portfolio while also increasing auto loan volume.
With more than 40 years of experience in developing market-differentiating consumer protection products, EFG Companies know how to break you out of the Groundhog Day lending cycle. Contact us to find out how today.