Currently, the headlines are offering a lot of doom and gloom for the subprime auto finance market with regards to rising auto loan delinquency rates and the sheer amount of subprime paper.
According to the February Equifax National Consumer Credit Trends Report, 21.7% of all auto loans originated between January and November, 2015 were issued to consumers considered to be in the subprime market.
This marks the fourth year where the subprime segment accounted for between 21 and 22% of all auto loans.
In addition, Fitch Ratings reported that in February, 60-day delinquencies experienced a 12% year-over-year increase, bringing the delinquency rate to 5.16%. This is the highest delinquency rate since October, 1996. To put this into perspective, delinquencies peaked at 5.04% during the 2008 financial crisis.
With strong subprime growth and increasing delinquency levels, smart lenders are evaluating their portfolio to determine the best method to address three pain points:
- maintaining a proactive risk-management strategy that decreases repossessions and collection costs;
- enhancing value propositions that increase both loan volumes and finance control; and,
- differentiating their institution in a crowded indirect lending market.
Some would argue that the best way to offset portfolio risk is by increasing APR. However, by doing this, lenders fail to address the other two pain points of increasing loan volume and differentiation.
The good news is that for industrious lenders there is another option that benefits the lender, the dealer and the consumer. That option is the use of consumer protection products, such as WALKAWAY® Vehicle Return.
With consumer protection products, like WALKAWAY, consumers are protected from the negative financial repercussions of instances like involuntary job loss. This same consumer protection also protects the loan. How? Consumers can either return their vehicle with no impact to their credit, or use payment relief to continue to make loan payments if an unforeseen life-changing event occurs. Either way, the lender’s risk and exposure is significantly diminished.
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