Across the board, the largest asset a financial institution has is its loan portfolio. But each financial institution is unique regarding its business goals and borrower demographics; therefore, findi...
3 Ways to Hedge Your Auto Portfolio Against Losses
Written by Michael Dippo
April 13, 2023
Financial institutions and their borrowers are up against challenging times. Many households are facing financial difficulties in the face of high inflation, while financial institutions are struggling to maintain profitability due to economic uncertainty and rising interest rates. As a result, many are focusing their 2023 efforts on reducing costs to maintain returns and supporting their borrowers during these difficult times.
The impact on borrowers has been particularly burdensome—especially where auto loans are concerned—and the cost of vehicles is not helping. According to Kelley Blue Book, “The average new car sold in November (2022) cost $48,681—a record high.” This has left some car owners struggling to make payments as they tap their savings or take out more loans to offset high inflation.
In this blog post, we’ll share three ways you can help alleviate upward pressure on borrowers and protect your auto portfolio against heavy losses.
Reducing Economic Burdens for Lenders and Borrowers
According to the research brief available in the banner below, credit card and auto delinquencies have been up for the past six months. While credit card late payments are still well below pre-pandemic levels, auto loan past dues have essentially returned to those levels seen in early 2020. According to Fitch Ratings, the number of auto borrowers who are past due at least 60 days reached 5.67%, more than twice the amount the same time the prior year.
Historically low levels of delinquency in recent years were artificially supported by unprecedented government stimulus. With this ending and inflation eroding savings and wage increases, past dues are beginning their return to normal.
With borrower savings rates declining steadily for the past 12 months, virtually every lender expects a deterioration in their loan portfolios in 2023. We have already begun to see insurance coverage levels deteriorate as well. As such, lenders should be looking to shore up their risk mitigation efforts with proactive steps that keep drivers on the right financial path. These tips may help.
1. Make Clear Communication a Priority
When new borrowers onboard, establishing effective communication regarding loan terms, due dates, and payment options can go a long way toward building a solid relationship. Send welcome letters to thank them for working with your institution, inform them of available resources, and alert them to additional products and services you offer that may help to alleviate financial strain. If loan expectations are transparent from the start, members may be more inclined to reach out for support before it’s too late.
Some lenders have also found success in educating their members on financial literacy topics, like budgeting and healthy spending habits. Empowered borrowers with foundational spending and saving knowledge may make better choices when it comes to managing their debt.
2. Utilize Tools and Incentives to Service Loans
Detecting payment issues early on can help borrowers get back on track before small hurdles become overwhelming financial obstacles. Even before an account becomes past due, watch for early delinquency cues and intervene with proactive communication when necessary. Sending monthly statements and reminders can also motivate borrowers who are in a financial bind to prioritize their loan payments over nonessential purchases.
Autopay provides lenders with steady cash flow and helps customers avoid late penalties, but only 30% of consumers have their auto loans on recurring payments. You can encourage greater enrollment by incentivizing the option with rate adjustments or other perks that are contingent upon the borrower’s continued participation in the autopay program.
3. Shore Up Insurance Coverage
Collateral Protection Insurance (CPI)—also known as lender-placed insurance—protects the lender’s interest in a vehicle if the borrower lets their comprehensive and collision coverage lapse. Traditional CPI programs include provisions for physical damage and theft, with the ability to add optional lender coverages such as repossession expense reimbursement, skip, and premium deficiency. Borrowers pay for an annual policy in which the premium amount is determined as a percentage of the outstanding loan balance, often ranging from $4,000 to $8,000. The added cost of traditional CPI premiums can often contribute to borrower default and, eventually, repossession.
SWBC’s hybrid CPI program is a cost-effective alternative to traditional CPI programs, as it only covers comprehensive, collision, and theft with the ability to add optional lender coverages. Regardless of the loan’s outstanding balance, hybrid CPI coverage charges a flat-rate monthly premium, typically ranging between $75 and $100. The borrower-focused cost structure of hybrid CPI enables more borrowers to maintain their payments and stay in their vehicles by keeping the cost of the policy low. Plus, the coverage for physical damage provides protection for your institution’s assets and there’s little need for premium deficiency without the burden of high-cost premiums.
A lender’s portfolio is normally their largest asset; therefore, they need to take steps to ensure it is properly insured. By taking a proactive approach to risk management and borrower assistance, lenders can better protect their auto loan portfolios and help ensure long-term financial stability.
As Senior Vice President of Automotive Products, Michael works closely with our Collateral Protection Insurance (CPI) carriers to manage existing CPI programs and develop new coverages for our clients. He is responsible for underwriting, corrective action, skip tracing, and asset recovery as they pertain to our CPI and blanket VSI products.
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