Rising Auto Delinquencies, Higher Charge-Off Risk, and What You Can Do to Protect Your Loan Portfolio
Why Are Auto Delinquencies on the Rise?
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Economic uncertainty and higher interest rates: The current economic environment is one of significant uncertainty, which can make people hesitant to make major purchases. Auto sales have slowed from their record pace just two years ago. Although interest rates may be rising less dramatically recently as the Fed has slowed the pace of rate increases, they are still markedly higher than we have seen for years. This is leading to increased competition among lenders, which can result in riskier loans being approved. There is also the potential for further rate hikes if inflation heats up again in the coming months.
- Record levels of debt: Debt of all kinds has reached historic highs, with total household debt at $16.5 trillion, including auto loan debt at $1.6 trillion and credit card debt at $986 billion and heading to the $1 trillion mark for the first time. To make matters even more hazardous, the average credit card rate is over 24%, which means many consumers are far less able to manage their debt than when rates were lower.
- Rising car prices: Over the past several years, the cost of new cars has increased dramatically, making it more difficult for many people to afford car payments. As of March 2023, the average new vehicle was priced at $48,008 — nearly 30% higher than in March 2020. In the first quarter of 2023, the average interest rate for an auto loan reached 7% — the highest level since 2008. These factors have combined to result in an average new car payment that has increased to a record of over $700 per month, with one in six consumers shelling out a mind-boggling $1,000 per month or more. The combination of high car prices and increasing interest rates have caused borrowers to take out larger loans they cannot comfortably repay, thus increasing the risk of delinquency.
- Longer loan terms: Auto loans aren’t just getting larger — many borrowers are also taking out longer-term loans to make their car payments more affordable. Experian has reported that 33% of borrowers are financing vehicles with loan terms of 73 months or longer. The longer a loan term, the higher the risk of a life change causing inability to pay or of maintenance issues with the vehicle, which are both causes of delinquency. The charge-off rate for new vehicle loans with longer loan terms (from 73 to 84 months) is nearly seven times the charge-off rate for loans from 49 to 60 months and nearly 15 times that of loans from 37 to 48 months.
- Payment deferrals: During the pandemic, many lenders offered payment deferrals to help struggling borrowers make their loan payments. While this provided temporary relief, it also means that some borrowers have fallen further behind on their payments and may struggle to catch up now that the deferrals have lifted.
Looming Repossessions and Charge-offs
The factors above have created an increasingly precarious financial situation for consumers. Both 30- and 60-day delinquencies have surpassed pre-COVID levels, and the Consumer Finance Protection Bureau (CFPB) reports the percentage of auto loans transitioning into delinquency is rising at an accelerated rate. This is evident particularly among non-prime and subprime borrowers, whose delinquency rates are now surpassing even 2009 levels. Even prime borrowers are feeling the pain, with their share of repossessions doubling. Repossession companies are seeing a spike in business, especially for vehicles purchased in 2020 and 2021. Unless the risk from these rising auto delinquencies and repossessions is mitigated, lenders may see increased charge-offs and a negative impact on overall financial performance.
The Importance of Collateral Protection — Especially in a High-Delinquency Environment
Collateral Protection Insurance (CPI) is a product that helps financial institutions such as banks, credit unions, and finance companies mitigate risk and protect themselves from the financial loss that can result from a borrower's failure to maintain the required insurance on a financed vehicle. CPI covers the lender's interest in the vehicle and can help prevent charge-offs in the event of a borrower's default.
When a borrower finances a vehicle, most lenders require them to maintain insurance coverage on the vehicle throughout the life of the loan. This insurance coverage protects the lender's interest in the vehicle in case of damage or loss, so if the borrower fails to maintain the required insurance coverage, the lender is at risk.
CPI is an important component of an auto lender’s risk mitigation strategy. By providing insurance coverage to borrowers who fail to maintain the required insurance on their own, CPI helps the lender recover the value of the vehicle if it is damaged, destroyed, or stolen. In the event of a repossession, a lender covered by a CPI program can file a claim with the CPI provider, helping them recoup some or all of the outstanding loan balance and reducing the risk of a charge-off. CPI coverage can also provide the lender with additional protection by covering expenses associated with repossession, transportation, storage, and other costs.
Not all CPI Programs Are Created Equal
While it’s important for a lender to protect its auto loan portfolio with CPI, it is just as important to choose a portfolio protection partner carefully. State National is the industry-leading provider of CPI, celebrating over 50 Years of Excellence in the industry. Because we specialize in portfolio protection, we have the exclusive ability to create programs tailored to fit the specific needs of each financial institution.
State National's CPI programs provide unmatched benefits, including:
- Customization: Because we are the only dedicated CPI provider that is also the underwriter, State National can offer highly customized CPI programs that are tailored to meet the needs of each financial institution. This allows every credit union, bank, or finance company to choose the level of coverage that best fits their specific needs and the risk profile of their borrowers.
- Advanced Technology: State National’s automation is one of the main reasons so many lenders choose us. From AI-based automated insurance tracking to instant automated claims payment to our proprietary InsurTrak tracking and reporting platform designed specifically for portfolio protection, our commitment to continuous innovation results in increased accuracy, greater speed, an enhanced client and borrower experience — and better bottom-line results.
- More Claim Dollars, Delivered Faster: State National offers superior claims management services without third-party claims processors, so we can more efficiently process our partners’ CPI claims. This not only reduces the time and resources needed to process claims, resulting in the fastest claims turnaround time in the industry, it’s one of the reasons we can pay out an average of 20% more in claims dollars than our competitors.
- Compliance Expertise: State National's CPI programs strictly comply with all applicable state insurance requirements, ensuring that financial institutions remain in compliance with all relevant laws and regulations. Our borrower notifications have been reviewed to ensure full compliance in every state, and our team of dedicated compliance professionals works diligently to maintain rigorous adherence. We are so confident in our dedication to exacting compliance standards that we offer full indemnification right in our clients’ contracts.
When you choose State National, you are partnering with the specialist offering the most comprehensive and flexible solutions to help financial institutions manage risk and reduce financial losses — especially in a time of rising auto loan delinquencies. To connect with a portfolio protection specialist and get a customized quote for your financial institution, contact resources@statenational.com or call 800-877-4567.
