Longer Loan Terms Threaten Higher Repo Rates

The threat of higher repossession volume looms as lenders extend loan terms to make monthly vehicle payments more affordable to consumers, said experts at the Used Car Week conference in San Diego last week.

The average repo rate among finance companies increased 54.4% in the third quarter, though it remained below 1%, according to fresh data from Experian Auto. Specifically, the repo rate was 0.62% last quarter, compared with 0.40% in 3Q12.

When a vehicle is sold multiple times ― sold initially, repossessed and remarketed to a dealer, and resold to another consumer ― the process affects the amount the lender can get for the car, noted Jeff Anderson, vice president of national auto sales at van Wagenen Financial Services.

As more loans are originated with terms that extend out as far as 84 months, repossessions will likely grow, Anderson said. And although today’s repossession numbers are still somewhat static, the volume of longer term loans being made suggests that borrowers will increasingly hit bumps on the road to repayment.

“Ten percent of one hundred is ten, while 10% of a thousand is a hundred,” said Anderson, adding that repossessions are happening faster today than they did in years past.

These days, repossessions are happening faster because the longer a lender waits to take back a car, the more the car’s value has declined. And if the car is damaged while awaiting a late loan payment, the less chance of recovering cash from an insurance provider when it gets the car back, he said.

In a few years, the market will likely see a growing number of consumers who skip on their loan because they’re upside-down, owing more than the car is worth, he said.