One of the fastest ways to determine a consumer’s loan risk is to research his ability to repay an automotive loan. Late payments? Missed payments? Refinancing? It’s all there on credit reports, and it can determine if the risk of making the loan is worth it.
So how do you get it right? How do you make sure you’re doing what’s best for your business? Datalinx LLC has done the research for you, especially for the buy-here-pay-here dealerships.
An important statistic
Loan delinquency rates are among the most important statistics in the automotive finance industry. If consumers don’t repay their loans, especially if they’re not repaid on time, it can put millions of dollars at risk. With that kind of money on the line, it amounts to big challenges for those in the lending world, including the consumer, automotive retailers, and even the lenders.
Issues related to loan charge-off patterns surfaced in the wake of the market crash of the fourth quarter of 2008. In short, it caused chaos in the industry. Conditions have improved considerably in the past few years. However, enders must remain vigilant about where delinquencies are most likely to occur.
But face it: It’s an unavoidable fact that some loans will be charged off. Getting an understanding on where these charge offs occur is a valuable industry lesson to learn.
Experian Automotive has found several clear patterns that can help lenders better understand the root cause of loan delinquencies. These can be found in vehicle buyers themselves through credit scores and length of credit history; through the vehicles themselves and their own history; and through the loans themselves by understanding the effect of loan-to-value ratios.
Each of these provides insight into charge-off patterns. Each can also significantly affect the way lenders adapt to this new way of doing business and adopt new models of lending.
Longer term loans = higher charge-offs
Longer-term loans are increasing in popularity. While this allows the consumer to get a more expensive vehicle with a lower monthly payment, it can be a higher risk for lenders. These days, it’s not unusual for consumers to borrow over 73 and even 84 months to pay off the debt from their automotive loan. For new vehicle loans with terms from 73 months to 84 months, the charge-off rate is nearly 15 times the charge-off rate for loans in the 49- to 60-month range.
The lesson here is to be aware of the length of the loan and what it can mean for future loan risk.
Length of credit history = predictor of potential charge-offs
There’s a clear correlation between the length of time someone has had a credit history and the likelihood of a new or used vehicle loan going bad. Customers who are in their first year with a credit history are five times more likely to have a charge-off than customers who have a credit history of 10 years or more. While everyone needs somewhere to begin their credit history, it’s important to consider the risks associated with first-time buyers with brief credit histories.
Vehicle history = potential impact on charge-off rates
While most loan charge-offs are related to customers, the vehicle itself can also be an indicator of a loan going bad. Vehicles with title brands are almost 1.5 times as likely to go bad as those for “clean vehicles. Keep these title brands in mind:
- Recycled, which is 10 times more likely to lead to a charge-off.
- Major Damage Incident, which is seven times more likely to lead to a charge-off.
- Title Damage, which is nearly four times more likely to lead to a charge-off.
Charged-off loans = higher loan-to-value ratios
Another predictor to potential charge-offs comes from the loans themselves in the form of high loan-to-value (LTV) ratios. This trend isn’t limited to consumers with bad credit. It’s actually more prevalent in lower-risk tiers often because lenders are willing to provide loans with higher LTV to customers with good credit.
Credit bureaus are also stepping in to assist lenders through this process.
The role of credit bureaus
Equifax, for example, has partnered with NAIDA to allow buy-here-pay-here, or BHPH, dealers, to report their loan portfolios. These BHPH dealers can report to Equifax regardless of the size of their portfolio. In short, this program helps dealers of all sizes become credit data furnishers with Equifax.
In the past, many NIADA members wanted to furnish trade data to credit bureaus. However, many smaller owners weren’t able to report, didn’t understand the process, or found the process too complex.
Equifax, for one, has lifted tradeline reporting minimums for NIADA members only. It has also dedicated resources to help make the process less complex for all dealers. Equifax offers one-on-one data analyst support to assist every dealer throughout the process, from on-boarding and set up to furnishing the data on an ongoing basis.
Reporting to credit bureaus can help consumers and dealers in the long run in a number of ways, including:
- Without reporting payments, consumers can’t prove they can repay an auto loan in a timely fashion, which ultimately prevents them from improving their credit score.
- It’s a way for consumers to rebuild their financial standing and BHPH dealers to offer better terms on the next vehicle purchase, along with enhancing customer loyalty.
- It encourages customers to make timely payments because their credit rating may be directly affected by how they perform on their loan.
- This also allows small- to medium-sized NIADA members to report credit trade lines.
There’s no question that the lending industry has gone through a solid period of recovery in the last decade. Consumers are also doing a solid job of repaying their loans in a timely fashion, and that’s good news for the entire industry. Keeping the factors outlined here can give you an edge over those who don’t.
Speak Your Mind