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How Lenders Can Combat Growing Delinquency Rates

Jan 25, 2024 MicroBilt News

How Lenders Can Combat Growing Delinquency Rates

Borrowers are defaulting on car loans at the highest rate in 27 years. According to a recent Fitch Ratings report, the percentage of subprime auto borrowers at least 60 days past due on their loans reached 6.11% in September - the highest level since 1994. This data, along with the Federal Reserve's plan to keep rates high for an extended period, puts lenders in a difficult position as it signals distress among car owners. 

So, how can bankers and lenders feel confident they are making smart decisions during this challenging time? Continue reading and learn more about:

  • The reasons for the increasing rate of auto loan defaults in the U.S. 
  • What new stats can help guide how organizations plan their next steps.
  • Which tools can give you an advantage over the competition.

An Overview of the Current Auto Lending Environment

There are several reasons for the unprecedented growth in delinquencies. Below, we cover three primary issues causing financial stress on consumers in the current economic environment.

Car ownership has gotten more expensive: The COVID-19 pandemic, significant supply chain issues, unhinged inflation, and the Federal Reserve's interest rate hikes have created the perfect environment for the 100 million Americans who have auto loan debt in the U.S. to miss their payment. The total amount of auto loan debt stands at $1.5 trillion — a record high. 

Still required for the average job: A recent study from the ACEA found that the number of vehicles on the road increased by 5.7 percent from 2021 to 2022. This growing number of automobiles demonstrates a consistent trend that for most consumers, owning a car is not driven by simply desire but is an essential living expense. The most recent Census data reveals that 69% of Americans drive alone to their jobs. 

Expenses have risen post-COVID-19: This necessary expense taxes many consumers, causing significant strain on many who have poor credit scores. Based on information from the Bureau of Labor Statistics, transportation expenses account for approximately 17% of the annual personal expenditures of Americans, ranking second only to housing costs.

Essential Data for Lenders to Know

Not all customers are going to struggle equally during this difficult time. Below are some data points that can give you a leg up when crafting a strategy for dealing with upcoming challenges:

  1. According to The Hill, sixty-day payment lateness increased to 1.8 percent from 1.32 percent in 2022, with the delinquency rate rising steadily over the last year.
  2. The percentage of subprime borrowers - credit scores below 640 - who were at least 60 days late on their car payments increased to 6.11% in September, up from 5.01% in just three months, according to Bloomberg, citing Fitch Ratings data.
  3. Delinquency rates for prime borrowers with credit scores of 680 or above increased slightly from 0.25% to 0.27% over the past three months.
  4. One in five borrowers owe $1,000 or more per month, according to the Financial Times (FT) Oct. 6 report.
  5. Cox Automotive predicts vehicle seizures will hit 1.5 million this year, up from 1.2 million last year.

Collect With Confidence Using These Important Tools

The risky environment poses a considerable threat to individual lenders, banks, and any financial institutions that work closely within the auto lending industry. So, what can lenders do to keep the problems at bay?

We ask that question at MicroBilt every day, knowing that lenders need to have industry-leading tools and data at their disposal to deal with challenging times. Whether it's having state-of-the-art credit decisioning tools to determine the risk of working with a customer or having fast automated solutions to improve your debt recovery efforts, we have you covered. 

Check out our full line of products and expand your market reach, increase profitability, and maintain regulatory compliance. Let's work together to drive your sales growth and take your business to new heights.