4 minutes
Five reasons delinquencies are up and how CPI can help
Both 30- and 60-day delinquencies have surpassed levels from before COVID-19, and the Consumer Financial Protection Bureau reports the percentage of auto loans transitioning into delinquency is rising at an accelerated rate. This is particularly evident among near-prime and subprime borrowers, whose delinquency rates are now surpassing even 2009 levels. But 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, credit unions may see increased charge-offs and a negative impact on overall financial performance.
Let’s explore five key factors driving auto loan delinquencies and a way for credit unions to mitigate this risk.
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 increases, they are still markedly higher than we have seen for years. This is leading to increased competition among auto 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—almost 30% higher than in March 2020, according to a report from JD Power. In the first quarter of 2023, the average interest rate for an auto loan reached 7%—the highest level since 2008, according to Edmunds. These factors have combined to result in an average new car payment that has increased to a record of more than $700 a month, with one in six consumers shelling out a mind-boggling $1,000 a month or more, according to Experian. The combination of high car prices and increasing interest rates has caused more 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 the inability to pay or of maintenance issues with the vehicle, both of which can be 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.
Mitigating the Risk of High Auto Delinquencies
Most credit unions require members who are taking out a car loan to insure the vehicle throughout the life of the loan. This insurance protects the credit union’s interest in the vehicle in case of damage or loss. If the member fails to maintain the required insurance coverage, the credit union is at risk.
Collateral protection insurance provides insurance coverage to borrowers who fail to maintain the required insurance on their own. As such, CPI is an important component of a credit union’s risk mitigation strategy.
CPI helps the credit union recover the value of the vehicle if it is damaged, destroyed or stolen. In the event of a repossession, a credit union 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 credit union with additional protection by covering expenses associated with repossession, transportation, storage and other costs.
Credit unions need to choose their portfolio protection partner carefully. They should consider vendors that can to tailor their offerings to fit their specific needs.
State National’s Director of Underwriting Claudia Ramirez has vast experience in insurance and management in multiple roles. Claudia received her B.S. in psychology from the University of Texas at Dallas and holds several 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, the industry-leading provider of CPI. A CUESolutions provider, State National is celebrating more than 50 years of excellence in the industry. To connect with a portfolio protection specialist and get a customized quote, email resources@statenational.com or call 800.877.4567.
