With a recession on the horizon, the landscape for financial institutions will become more difficult for the rest of 2022 and into 2023. Rising delinquencies, tighter margins driven by an inverted yie...
Though U.S. auto sales have cooled of late, one segment is thriving and even growing against the odds. Almost 70% of all auto sales these days consist of light-duty trucks and sport-utility vehicles (SUVs), according to Bloomberg. Meanwhile, mid- and full-size trucks are also enjoying double-digit sales growth, reports trucks.com.
While the automotive industry and numerous dependent industries, such as auto lending, are usually pleased with increased vehicle sales in any segment, this time there's a catch: trucks and SUVs have become the priciest class of vehicles, and borrowers are beginning to have a hard time paying back these larger loans.
Advanced Features Drive Up Prices
In the past, feature-rich, high-end sedans were the most expensive auto class. These days, sedans are proving unpopular with consumers, who prefer trucks and SUVs. To satisfy demand and encourage purchases, auto manufacturers are bringing premium features to trucks and SUVs, making these work and towing vehicles feel modern, easy, luxurious, and comfortable with details like these:
Advanced safety and security elements, such as collision and lane-departure alerts
Automatic parallel parking
Blind-spot monitors and cameras that account for trailers
Advanced interior design, premium seats, and zoned temperature controls
Large (12 inches) touchscreen devices to display camera feeds, navigation, apps, and internet
USB ports and advanced device connectivity
Satellite radio systems and surround sound speakers
As you’d expect, advanced, premium features like these come with premium price tags. To make worth adding these luxury systems, truck manufacturers are charging high prices compared to base model pickup truck pricing: $35,000 on average. Ford’s loaded new F-Series costs $100,000!
There's good news for lenders: with prices like that, consumers won’t be paying cash. However, the bad news is that borrowers may struggle to repay such monstrous loans, leaving lenders to absorb the costs of repossession and depreciation.
Watch for Signs of Greater Delinquencies
With U.S. household debt almost back to pre-recession levels, consumers certainly do not seem worried about taking on debt. However, auto lenders must worry about being repaid. According to The Washington Post, more than 6 million U.S. auto borrowers are currently at least three months late on auto loan payments. The Federal Reserve Bank of New York warns that the past couple years have brought a “notable increase” in auto loan delinquency, particularly from subprime borrowers.
Slowing Down Delinquencies
The auto lending industry has two good options for minimizing the chances of delinquency:
1. Reconsider long loan terms.
In an effort to make monthly payments manageable, lenders have been lengthening loan terms and running the risk of loaning more than borrowers can afford to repay. Expensive pickup trucks today are often financed over seven years! Given that longer loan terms are associated with higher rates of delinquency, make sure to weigh the increased chance of delinquency when extending longer loan offers.
2. Use technology.
As vehicle technology has advanced, so has auto repossession industry technology. Take license plate recognition, for example. By working with a vendor that uses camera car technology to scan license plates on parked cars, your financial institution receives access to up-to-the-minute location data for vehicles and alerts when a vehicle sought for repossession is located and available, drastically cutting the time and expense involved in recovering assets.
With auto manufacturers seeing much greater profits from trucks and SUVs than from traditional cars, we're sure to see them continue to invest in technology and advanced features that drive sales of this profitable vehicle class. It’s up to the lending industry to protect its portfolio from delinquency.
Learn more about managing lending risk, protecting your collateral, and addressing delinquency in SWBC’s new ebook, Recipe for Risk Management.
Karen Townsend is the Director of Product Sales for SWBC and possesses an extensive history in the auto finance industry, specifically within the repossession and remarketing arena. She has led operational teams at a senior level and has also been on the sales side of the house, working directly with clients to help them navigate through their loss mitigation needs. Having been a client herself, Karen brought a unique perspective to her previous position as SWBC's Loss Mitigation Program Manager, giving her the ability to deliver insights from an operational and functional point of view. She is dedicated to the highest levels of customer service and to delivering client solutions that offer the most streamlined, efficient, and effective solutions available. Karen holds a master’s degree in organizational leadership with an emphasis on strategic innovation and change management from Colorado State University and a bachelor’s degree in organization development from Regis University.