Your members are facing financial stress. The government’s stimulus checks have long run out, as have the grace periods many financial institutions implemented during the pandemic. Many individuals have returned to work and are again bearing the costs of gas, transportation, childcare, and other employment-related expenses.
With many Americans increasingly financially strapped, what does this mean for lenders?
Unfortunately, prices are soaring and might continue to rise. We know those directly impacted by inflation — which is all lower- to middle-class Americans — alter their consumption, investment choices, and spending habits as their purchasing power decreases. Something has to give as consumers struggle to make ends meet. Unfortunately, many might scale back or even cancel their auto insurance.
In addition, consumer debt-to-income ratios are expected to increase. Many borrowers have taken out large auto loans, particularly on used cars. They will be stuck with these loans even as the value of the item purchased decreases long-term, potentially putting the borrower upside down on their loan with a vehicle worth considerably less than what they still owe.
Revenue Lost In Charge-Offs
What does this mean for credit unions? Unfortunately, the financial stress being felt by consumers also increases risk in a lender’s loan portfolio. If credit unions have provided loans for vehicles with a hyper-inflated value, it’s likely they will see an increase in bad debt as those loans start to default to historic norms and possibly higher.
Without proper risk mitigation measures in place, if the collateral sustains damage or loss when a borrower is uninsured or underinsured, the credit union making the loan can also find itself “upside down,” so to speak, with the claims amount received insufficient to cover its exposure.
Not all is lost, however — credit unions with a high-quality portfolio protection insurance program will experience relief from a significant amount of this bad debt. This critical protection will not only keep borrowers covered but also safeguard a credit union’s balance sheet.
Insurance Tracking Helps Lenders Manage Risk
In addition to the protection provided by the insurance coverage, lenders can also use the detailed borrower insurance tracking in the program to assess and mitigate risk. High-quality, real-time tracking allows a credit union to leverage knowledge of a borrower’s lack of coverage as an indicator of when a loan might be at a higher risk of default. This early warning sign provides an opportunity to initiate preventive steps to work with those members to avoid collections, as well as take proactive measures to step up early collections efforts.
Valued Business Partners Can Help Your Credit Union Thrive
Other tools are also available to help your credit union tackle inflationary hardships as you are undergoing a double squeeze from tighter net interest margins. On top of decreasing your charge-offs, these additional partner tools can help further boost your bottom line. Added to a quality portfolio protection program from State National, an add-on program like Claims Advocacy and Recovery Services (CARS) serves to further mitigate your auto portfolio losses and reduce your internal expenses by allowing us to manage repossessed collateral and remarketing profitability at auctions for you while also maximizing settlements from outside insurance claims and recovering suspected skips.
Relieving your staff of these complex and time-consuming tasks gives them more time to spend servicing your membership and allows your credit union to turn its full focus to cutting costs and maximizing revenue in other ways to help maintain growth and profitability — even in an inflationary or otherwise uncertain economy.
This article is the second in State National’s SNC Spotlight series on Tackling Inflation and the Auto Industry. Read the first article in the series, “Part 1: Protecting Your Credit Union From Car Market Volatility.”