Financial Services

The Wait Is Over – The World of Hurt for Auto Lenders Is Here

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Back in May, we wrote about how various factors were converging to put a world of hurt on auto lenders. Auto loan originations hit a record high during the pandemic, total outstanding debt grew, and constrained inventory and pent-up demand drove new and used car prices (and monthly payments) to record highs. We highlighted the risks to auto lenders who financed vehicles at elevated prices and would inevitably find themselves underwater as the chip shortage eased, expanding the pool of vehicles to choose from and lowering transaction prices as the market returned to some semblance of normal.

But people were still buying cars. Carmakers were struggling to get vehicles out the door, but with the chip shortage causing such high demand (and prices), manufacturers and dealerships were making record profits on fewer cars sold.

It was all good. And now it isn’t. That didn’t take long.

In June, Ford CFO John Lawler said the company had started to see delinquencies increase. Average monthly car payments are now $712, a record high. Twelve percent of new car buyers in June had monthly car payments over $1,000, another record high. And the chip shortage is easing, as supply is finally meeting demand.

The historic lows for auto loan defaults and repossessions, fueled by the combination of federal assistance and loan accommodations developed by auto lenders, have come to an end. Millions of consumers who took advantage of these assistance programs are now at higher risk for default.

A July 8th Barron’s article highlighted the ugliness that is coming to the auto finance industry. Most of the current repossession inventory stems from loans booked during the pandemic; loan-to-value ratios are around 140%, versus a more acceptable 80%; and many of these loans were extended to buyers who had temporary pops in income during the pandemic. Companies in the business of repossessing autos are buying car lots to handle the flood of repossessed, used cars coming to the market, and banks are leasing more land to handle an expected car repossession surge. Both prime and subprime repossessions have nearly doubled since 2020.

We believe the bursting Auto Loan Bubble will affect many more consumers than the traditional sub-prime borrower, especially as inflation, rising interest rates, and falling stock markets continue. We know that auto lenders who modernize their collections practices will have an excellent first line of defense in decreasing delinquencies and protecting their balance sheets. Now is the time for auto lenders to address their debt collection operations.

Perficient specializes in helping lenders modernize their collections operations to provide “empathy at scale” to get paid first, maximize customer lifetime value, and create more loyal customers.

Our debt collection offerings meet a growing, immediate market need to assist lenders and finance companies in improving their debt collection function, paving the way for the focus to shift back to the customers’ financial well-being and loyalty and resulting in lower delinquencies and charge-off rates. Our goal is to help lenders humanize debt collection through empathy and personalization strategies. We know it works.

We’ve developed a voice in this space and have seen great success in reducing loan-loss rates with our balanced approach that addresses people, processes, and technology. If you want to learn more, contact Scott Albahary (Scott.Albahary@perficient.com) or Byron Gifford (Byron.Gifford@perficient.com).

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Scott Albahary, Chief Strategist, Financial Services

Scott Albahary applies his wide range of knowledge and skills to advise Perficient’s financial services clients on business and technical strategies and on defining, developing, and implementing these specific strategies.

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