When it comes to paying bills, some people have a million excuses (both valid and invalid) for skirting their obligations. Unfortunately, lenders constantly deal with borrowers' excuses when it comes ...
The auto loan industry is massive and chances are that if you are a financial institution, you are also in the auto loan lending game. For the first time in first-quarter history, open auto loans have surged past $1 trillion per market research firm, Experian Automotive. Due to their findings, they have advised lenders to “keep a close eye on delinquency trends to ensure the market remains healthy.” Should consumers keep making timely monthly payments, the market has a greater chance of maintaining affordable financing options. While auto loans can offer profitability for a financial institution, there are also some downfalls and risk when it comes to the lending industry. In recent years, the auto-loan industry has seen a rise in delinquencies. And, of course, this is never a good thing for financial institutions.
When borrowers can’t afford to or don’t make their auto loan payments on time, it can take a toll on a lender’s bottom line. According to the Q4 2016 Industry Insights Report by TransUnion, the auto delinquency rate reached 1.44% to close 2016, a 13.4% increase from 1.27% in Q4 2015. Auto delinquency is at its highest level since the Q4 2009 reading of 1.59%. But, these trends are not limited to the auto industry; delinquencies are on the uptick when it comes to credit cards as well. So, what does this mean for financial institutions? It means that no matter how diligent or conservative your lending practices may be, it is inevitable that some borrowers will default on their loans.
One proposed solution is to tighten lending guidelines to mitigate the number of delinquencies that your institution encounters. Another major factor for consideration with the rise in delinquencies is how lenders will begin to collect from delinquent borrowers.
With a strong economy and an increase in jobs and wages, consumers have more confidence when it comes to their spending habits. These spending habits have impacted the number of loans that lenders are offering to borrowers. While this opens up opportunity for more business, it also increases the risk that lenders face. Lenders must be prepared with a well, thought-out plan to collect on delinquent accounts.
While many lenders opt to keep their collection efforts in-house, there are numerous benefits to outsourcing collections. Outsourcing collections allows financial institutions to shift their previously committed focus to:
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Expand on areas with potential growth and focus on the overall strategy to increase their bottom line
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Eliminate resources focused on back-office processes and utilize that time on efforts that build and grow customer relationships
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Allow employee growth by opening more opportunity to focus on specialized areas other than collections
Outsourcing collection efforts can be a game changer for many financial institutions. Whether it be all or a portion of their collections, outsourcing allows lenders to increase their productivity and reduce costs. It can cost a third-party collections team five to 10 times less to collect a dollar than it would cost a financial institution.
Related reading: The Top 5 Benefits of Outsourced Collection Services
It’s unclear how long the rise in delinquencies will linger so make sure that you take the proper measures to ensure that your collections strategy makes sense for your financial institution. Whether you keep collections in-house, outsource a portion of it, or outsource all collection efforts depends on your lending portfolio, but investing your time to find the right option for your financial institution will save you time and money in the long run!
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