Why are auto delinquencies on the rise?
- 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 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.
- Record levels of debt: Debt of all kinds has reached historic highs, with total household debt at $16.5 trillion. Auto loan debt is at $1.6 trillion, and credit card debt is 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 exceeds 24%, which means many consumers are far less able to manage their debt than when rates were lower.
- Rising car prices: During 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 more than $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 has caused borrowers to take out larger loans they cannot comfortably repay, thus increasing the risk of delinquency.
- 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, 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.
- Payment deferrals: During the pandemic, many lenders offered payment deferrals to help struggling borrowers make their loan payments. Although this provided temporary relief, it also means some borrowers have fallen further behind on their payments and might 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 near-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, credit unions might 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) helps credit unions mitigate risk and protect themselves from the financial loss that can result from a member’s failure to maintain the required insurance on a financed vehicle. CPI covers the credit union’s interest in the vehicle and can help prevent charge-offs in the event of a member’s default.
When a member finances a vehicle, most credit unions require them to maintain insurance coverage on the vehicle throughout the life of the loan. This insurance coverage protects the credit union’s interest in the vehicle in case of damage or loss, so if the member fails to maintain the required insurance coverage, the credit union is at risk.
CPI is an important component of a credit union’s risk mitigation strategy. By providing insurance coverage to borrowers who fail to maintain the required insurance on their own, 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 additional protection by covering expenses associated with repossession, transportation, storage, and other costs.
Not All CPI Programs Are Created Equal
Although it’s important for a credit union 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 more than 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 credit union.
When you choose State National, you are partnering with the specialist offering the most comprehensive and flexible solutions to help credit unions 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 credit union, contact resources@statenational.com or call 800-877-4567.
About The Author: Claudia Ramirez is the director of underwriting at State National. Ramirez has vast experience in insurance and management in multiple roles. She 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.
