Experian’s Q3 State of the Automotive Finance Market Report revealed that 60-day auto loan delinquencies rose past pre-COVID levels, prompting concern for the auto lending industry. According to Fitch ratings, a record number of subprime borrowers are behind on auto loan payments by more than 60 days, hitting 6.11% in September. Vehicle repossession rates are also on the rise, leaving many without transportation. High delinquency and default rates mean lenders could face significant losses as they have more difficulty recouping funds.
Another interesting data point is the scale of student loan debt compared to auto loan debt. In the first quarter of 2023, more than 43 million people in the U.S. were holding federal and private student loan debt, totaling more than $1.77 trillion overall. However, in September, the Wall Street Journal reported that the total amount of auto loan debt had surpassed student loan debt. At the end of Q2 2023, auto loan debt reached $1.58 trillion compared to $1.57 trillion in student loan debt.
Much of the loan debt can be attributed to the rise in car payments. According to Edmunds, the average new car payment in Q3 2023 reached $736 per month – a 4.6% increase over a year earlier. Experian reports that three times as many people paid more than $1,000 monthly toward an auto loan. Think about how this trend line correlates with the rise in delinquencies.
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Consumers with student loan debt did receive a bit of good news as the Biden administration announced this month that borrowers enrolled in the new SAVE plan will be eligible for debt cancellation if they originally borrowed $12,000 or less to attend college and if they have made at least ten years of payments.
Strategic Steps to Safeguard Revenue
As lenders look to protect their auto loan portfolios from delinquencies and defaults, there are several potential steps to take.
Regain credit union market share.
After a resounding 2022, credit union market share in auto lending dipped precipitously in 2023, lost primarily to captives and coming in third behind banks. However, according to Experian, credit unions continue to lead in the used loan segment, with over 30 percent of the total market share across franchise and independent dealers. Credit unions are best suited to support a tight credit market by offering better terms and length of financing to consumers who are shopping for the best deal. We encourage lenders to work closely with their dealers and aggressively market to buyers shopping for a vehicle in 2024.
Find good loans in the subprime demographic.
With more than a third of Americans considered subprime borrowers, this consumer segment pays considerably higher interest rates, with rates for new cars averaging 11.5% and 18.5% for used autos, according to Experian. These interest rates price many subprime borrowers out of a good, reliable vehicle. However, a subprime customer may have more going for them than a cursory review reveals. We encourage lenders to dig below the surface and find the gems available in the subprime space.
Support the EV market.
Big banks and captive lenders largely ignore EV buyers’ needs, many of whom are prime or super prime customers. Other lenders are likely financing EVs just like gas vehicles, ignoring a $10,000 to $20,000 green premium and a unique customer journey that requires additional information, including battery range and EV chargers. EV customers also prefer financing online outside the dealership. We encourage developing a differentiated EV finance approach that includes unique educational content, support for incentives, and offering favorable financing.
Protect the loan and the buyer.
Vehicle protection products and debt protection are the best offerings to safeguard the loan from the risk of delinquencies, keep the vehicle on the road, guard against unexpected financial loss, and increase the value and marketability of your auto loan. We encourage lenders to understand each buyer’s unique needs and customize a protection package that works for both.
As we start 2024, the devil may be in the details, but there are revenue opportunities. Work with your team of experts at EFG and protect the value in your auto loan portfolio. We’re not just a provider; we’re a business partner.