Delinquency Deluge for Auto Lenders

Facing Recovery Rates at Historic Lows

The American auto lending industry is facing a perfect storm. A combination of economic pressures and logistical hurdles are creating a nightmare scenario for lenders struggling to recoup losses on defaulted loans.

The Culprits:

Plummeting Used Car Values: According to Kelley Blue Book (KBB), used car prices dropped by an average of 14.7% between Q2 2023 and Q2 2022 [source: Kelley Blue Book]. This means lenders are recovering significantly less money when they repossess vehicles and sell them at auction.
Strapped Borrowers: Inflation, as reported by the Bureau of Labor Statistics, reached a 40-year high of 8.5% in March 2022 [source: Bureau of Labor Statistics], squeezing household budgets and pushing delinquency rates upwards. The Federal Reserve Bank of New York estimates that the delinquency rate on auto loans in the US reached 5.2% in Q4 2023 [source: Federal Reserve Bank of New York], a significant increase compared to the pre-pandemic level of 3.9%.
Recovery Roadblocks: The decline in used car values has also impacted the repossession industry. Many recovery agencies have gone out of business due to shrinking profit margins. This logjam is leading to longer wait times to repossess vehicles, further hindering lenders’ ability to recoup their losses.
The Result: Recovery rates, the percentage of the loan amount recovered through repossession and resale, have plunged to historic lows in the US. According to a recent report by Auto Finance News, lenders are only recovering an average of 65% on defaulted loans, down from 80% pre-pandemic [source: Auto Finance News]. This translates to billions of dollars in losses for the industry.

A Similar Story Across the Pond:

The situation in the UK mirrors the challenges faced by lenders in the US. While the exact statistics may differ slightly, the trend of rising delinquencies and falling recovery rates due to a combination of inflation and decreased used car values holds true. According to Fitch Ratings, the delinquency rate for subprime auto loans in the UK reached 6.11% in September 2023, a significant increase from 5.01% just three months earlier [source: Fitch Ratings].

The UK market also faces additional challenges such as rising interest rates, which can make auto loans more expensive for borrowers and further strain household budgets.

Charting a New Course:

Auto lenders need to adapt their strategies to navigate this challenging environment.

Early intervention: Proactive outreach to at-risk borrowers with tailored solutions like loan modifications or hardship programs can prevent defaults before they happen.
Digital Collections: Utilizing technology for automated communication and online payment options can streamline collections efforts and improve efficiency.
Strategic Partnerships: Collaboration with repossession agencies through profit-sharing or volume guarantees can incentivize faster recovery times.
Risk-Based Lending: Reassessing creditworthiness criteria to account for the current economic climate can ensure lenders are extending loans to borrowers who are more likely to repay.
The auto lending industry is at a crossroads. By implementing creative solutions and adapting to the changing market conditions, lenders can weather this storm and ensure the long-term health of their business.