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5 Factors Contributing to Increased Risk for Auto Lenders

Rising Auto Delinquencies, Higher Charge-Off Risk, and What You Can Do to Protect Your Loan Portfolio


Why Are Auto Delinquencies on the Rise?

  1. 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.
  2. 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.
  3. 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. 
  4. 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.
  5. 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


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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:

  1. 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.
  2. 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.
  3. 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.
  4. 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 or call 800-877-4567.

Claudia Ramirez
Claudia Ramirez
Director of Underwriting Claudia Ramirez has vast experience in insurance and management in multiple roles. Claudia received her Bachelor of Science degree in Psychology from the University of Texas at Dallas and holds a number of insurance industry designations, including CPCU, CLU, and FLMI. Her skill set and industry expertise allow for a comprehensive understanding of internal and external industry factors that influence and impact State National.

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How Much Money Can We Save You? 4 Questions to Find Out

Protecting your auto loan portfolio doesn’t need to cost your credit union, bank, or finance company as much money, time, and resources as it does today. With seamless implementation and a multitude of unique advantages in our service model, State National saves lenders money. Just how much? Let’s find out! 1. How many auto loans do you have in your portfolio and how much time per week does your staff spend on managing collateral protection in your current portfolio? Our program is built to free up your staff’s capacity and provide you with FTE savings. Our exclusive lender platform, InsurTrak, has every tool you need, including: Real-time data on borrower insurance status, notifications sent, account history, insurance documentation, and all borrower interactions Instant, on-demand access to all recorded borrower phone calls. Fast, automated payment change and refund information On-demand management reports and customized, transparent reporting of all aspects of your program Created in-house and customized for CPI programs specifically, InsurTrak is the industry powerhouse in tracking, claims filing, reporting, and program management, all in one user-friendly, easy-to-use platform. “Efficient? I’d estimate State National’s system saved us 6 figures and 1 FTE!” ~ Steve McIntire, VP of Administration and General Counsel, SELCO Community Credit Union 2. What is your 12-month claim benefit? State National returns, on average, 20% more in claim dollars than other providers. Because we are the carrier, underwriter, and claims payer, there is no middleman and almost no paperwork required. Many claims are processed in 10 seconds with AI and those that need further review are paid within 5 days of their submission date. That’s 5 days start to finish. Additionally, filing a claims payment has never been easier for your team. Our claims form comes pre-populated with data from InsurTrak. You don’t even have to decide which claim type you want to file — we automatically process each claim for ALL available coverages, regularly returning more dollars to you. Did I mention we have broader coverages that provide more value to the financial institution? Not only that, but we offer a borrower-centric coverage that allows your borrower to file a claim even if they are uninsured! “State National has saved us a truly significant amount of money.” ~ John Grimes, AVP of Collections, MAX Credit Union 3. If you have a CPI provider, what is your current CPI penetration? We reduce CPI penetration by 20-30% because of our proprietary AI tracking software, proactive verification methods, and our email and text programs. Our Web-Based Robotic Automated Processing (WRAP) software automatically extracts insurance information from insurer websites and updates it in InsurTrak — without any human effort or intervention. WRAP uses AI and machine learning to proactively search for new policy information from seven different carriers, including the country’s top five auto insurers, before ever notifying a borrower. Only if we can’t verify insurance through WRAP or our other proactive and behind-the-scenes verification methods do we reach out to the borrower via multiple channels, including email and text. Borrowers can easily respond through the channel they prefer — email, phone, or our borrower-facing portal. They can even send an image of their insurance information by text! All this combines to create a more seamless, frictionless experience that results in lower penetration rates and greater client and borrower satisfaction. “Even though State National provides the insurance, I know their goal in the end is to NOT have forced placements. It's an active partnership that hits from all angles.” ~ Lora Stebleton, Vice President of Payments & Customer Service, Gate City Bank 4. What core processor do you use? InsurTrak is engineered to work seamlessly with all major core processors. Because innovation is our mindset, we have multiple automation options available to accommodate your systems and processes. When designing InsurTrak, we kept software compatibility a top priority. This means seamless real-time premium adds, refunds (including partial refunds), and payment syncing. With minimal steps to set up, you can link Symitar Episys, Temenos, and AKUVO directly to InsurTrak. For those who use Symitar Episys, State National has set up two-click direct connectivity, allowing all InsurTrak data to be accessed through your Episys system. Temenos and AKUVO users can easily connect to InsurTrak within their frameworks using the State National connector. “I just don’t think anybody else out there can compete with what State National has as far as the product, the technology and innovation, and how many things are automated.” ~ Corey Rupp, Chief Retail Officer, Affinity Plus Credit Union Switch Without a Glitch Once you decide to partner with State National, our dedicated Program Implementation Team is there to guide you all along the way and answer any questions you may have during any step as you onboard. “It was the best implementation I have done with any company. It was flawless.” ~ Joy Dominguez-Mota, Department Manager, Nationwide Acceptance Want to determine the actual savings your financial institution can achieve with these advantages? Let us know your answers to these questions and see how you can take advantage of these and other exclusive benefits. Sign up for an in-depth, customized consultation and program review today to see how much time and money we can save you!