Prepare Your Collections: Climbing Auto Loan Delinquencies and Repossessions

Car loan debt in the U.S. is at a record high of $1.56 trillion. Between sky-high inflation, rising interest rates, and persistent supply chain and chip shortages, getting an auto loan has gotten more difficult and expensive for consumers. 

Fed rate hikes and growing inflation There's a growing number of consumers falling behind on their monthly car payments. 

In September, Fitch Rating reported that the percentage of auto borrowers who were at least 60 days late on their bills rose to 6.11%. That marks the highest default level in nearly three decades and is a notable increase from the previous record of 5.93% in January

With higher default rates and customers struggling to make timely payments, car repossessions are on the rise again after a pandemic low. Auto lenders and collections teams must adapt their strategies to handle the higher volume of delinquent accounts and act fast in the early stage of collections to get paid first, ahead of other creditors.

What’s causing the rise in auto delinquencies and repossessions?

As the economy continues to face uncertainty, decisions made by the Federal Reserve and the remaining supply chain issues all play a part in the rise in delinquencies and repossessions. Let’s look at the most significant contributing factors. 

Inflation and interest rate pressure on loan originations

Although the overall inflation rate has been trending downwards over the past few months, the last report from September 2022 showed a 40-year high. Prices are increasing at an accelerated rate, and wages have not kept up. 

Following the latest 0.25 percentage point increase, the average interest rate for a 60-month auto loan on a new car increased to 6.27%, up from 6.07% in November 2022. For comparison, just a year earlier, those rates were 3.96%.

Higher auto loan payments and longer terms

In the past year, consumers paying more than $1,000 monthly on auto loans have jumped from 10.5% to 15%. Many consumers opt for extended loan repayment periods to afford the higher prices. While this may bring short-term relief, it has a higher default risk. A Federal Reserve Bank of Philadelphia study found that six- and seven-year auto loans had several times the default rate of conventional five-year loans.  

Supply and chip shortages for cars

Despite lifting COVID restrictions, the automotive industry is still grappling with supply chain challenges, notably the ongoing semiconductor chip shortages. Since most semiconductor chip manufacturers are in China and Taiwan, alternatives are limited. Although we see improvements in supply, until these issues resolve, the new car market will experience inflated prices. 

Car buyers are taking on more debt than ever due to the increased vehicle price and interest payments on auto loans. With consumers having less money available and prioritizing bill payments, other necessities get ahead of auto loan payments. When consumers default on their loans, car repossessions become the last resort to minimize losses, but repossessions are costly and require additional resources and operational infrastructure to execute.

4 ways auto lenders can prepare their collections

TransUnion expects auto delinquencies to persist at an elevated level through 2023. Even if prices fall, all signs from the Federal Reserve Bank signal that interest rates are unlikely to fall back to pandemic-era levels anytime soon. That means the cost of borrowing money will remain high. Let’s look at four ways to be proactive in your collection strategy ahead of these challenges.

1) Prioritize a positive customer experience

Defaulting on a loan and starting the collections process with a customer can bring up a lot of shame and anxiety. Adopting a customer-centric approach in every stage of collections should be prioritized the way it is in loan originations.  Creating a positive, empathetic repayment experience is critical for customer loyalty and retention. 

2) Ensure you have a proper audit trail

Before repossessing a car, you need an audit trail as legal proof of delivery to protect and remain compliant with the law. A digital format is preferred to eliminate costly human errors.

3) Offer flexible payment plans and arrangements

When collecting on a delinquent loan, demanding payment in full in a certain number of days in this economic state is almost impossible. Work with your customers by breaking their outstanding debt into manageable chunks. While offering payment arrangements might mean a slower collection process, these smaller payments add up over time and are better than not collecting anything.

4) Leverage technology for efficiency 

As auto loan defaults increase, there will also be an increase in collection tasks. Technology is there to ease the workload by automating otherwise time-consuming functions open to manual human error. With consumer behavior in communication changing, implement debt collection software to better engage your customers by empowering them to self-cure a late payment without agent intervention. Collection teams can then focus on more complex accounts that need human attention. 

There is still so much uncertainty about how these external factors will continue to impact auto lending. By implementing proactive tools that help solve your collection problems, you can get ahead of bad debt and improve your bottom line. Lexop’s debt collection software can help you build a positive customer experience, provide a certified audit trail with every email sent and automate collection tasks to make your teams more efficient. 

Find out how Lexop is helping auto lenders turn collections into a revenue-generating function.