If you’re a credit union, chances are you’ve made some gains in your auto lending portfolio in the past few years. According to Experian’s report on the state of the automotive finance market, auto loan balances hit yet another record high in the third quarter of 2019 — climbing past $1.22 trillion, up 4% from 2018.
While auto loans can add profitability to a credit union’s lending portfolio, there are also some risks when it comes to delinquent accounts. In recent years, the auto loan industry has seen a rise in delinquencies, which has encouraged credit unions to create strategies around how best to manage these accounts.
In third quarter 2019, Experian reports that 30-day delinquency rates remained stable at 1.4%, and 60-day delinquency rates increased slightly. With auto loan payments remaining high and interest rates continuing to increase, it’s a good idea to keep a close eye on delinquency trends to ensure a healthy portfolio, and to have a strategy in place for protecting your portfolio from delinquent loan accounts.
Consider these options to mitigate the consequences of auto loan delinquency:
Reconsider Long Loan Terms
When it comes to auto lending, delinquency is just a part of the game. All successful credit unions must mitigate as much risk as possible to protect themselves and their borrowers. Longer loan terms provide more time for something to go wrong during the life of the loan. So, by lengthening loan terms, credit unions are taking on that much more risk that their borrowers will not be able to repay. These days, many of the newer model cars are financed over seven years!
Since higher rates of delinquency go hand in hand with longer loan terms, make sure to weigh the increased potential for delinquency when extending longer loan offers.
Adjust Lending Guidelines
One proposed solution to dealing with delinquent auto loans is to tighten lending guidelines to mitigate the number of delinquencies that your institution encounters.
Offer Financial Education
Don’t underestimate the value of providing a delinquent borrower free financial education. With the proper educational resources and direction, a borrower who is behind on their auto loan payment today could easily become a member in good standing tomorrow.
The best way to provide cost-effective financial education is to create an accessible library of resources on various topics on your website and/or online banking portal. Within each topic, you would include relevant, easy-to-understand resources, such as tip sheets, guides, calculators, short videos, tutorials, and any other items that your members and prospects may find valuable.
Outsource Collections Activity
Delinquent accounts are expensive — not just because the loan payment isn’t being made, but also because of the added costs associated with tracking down the payment or recovering the collateral. With the continuing rise in auto loans, lenders need to be prepared with a well thought-out plan to collect on delinquent accounts.
One option that many credit unions choose to go with is outsourcing their collections efforts. Outsourcing can often take a heavy burden off internal staff and free them to focus on more big-picture tasks. This helps create an environment that fosters growth by opening more opportunity to focus on specialized areas other than collections.
Outsourcing collections activity helps credit unions free up the resources to expand on areas with potential growth and focus on the overall strategy to increase their bottom line. It also helps free up space by eliminating resources dedicated to back-office processes and refocus those resources on efforts that build and grow member relationships.
Some credit unions opt to outsource some of their collections activity while keeping some in-house. Whether it be all or a portion of their collections, outsourcing allows lenders to increase their productivity and reduce costs. A third-party collections team can collect a dollar for drastically less money than it would cost a credit union to collect the same dollar.
If your auto loan portfolio is expanding to keep up with the latest trends in the market, you may want to evaluate your internal operations and expenses to help determine the potential impact of scaling up your credit union’s collections department versus outsourcing one or more aspects of your operation to a third party.
For help with your decision, take our self-assessment, A Guide to Auditing Your In-House Collections.