Two trends could spell trouble for auto lenders looking to safeguard their loan portfolio.
First, a trend toward longer loan terms continues. Experian reports that loans with terms longer than six years jumped 19% in the fourth quarter of 2013, and J.D. Power reports that a record 33.1% of loans are now 72 months or longer. This comes while the average amount financed for a new car is now the highest since 2008.
Second, Fitch Ratings, which also noted the trend in longer-term loans, has assigned a “negative” outlook to the auto lending sector, based on increased nonprime lending, eased underwriting standards, and moderation in used car values. In fact, nearly 15% of lenders have relaxed credit terms including down payment requirements, credit scores, and loan maturities. Standard & Poor’s likewise expects auto lenders’ asset quality to weaken in 2014.
Long-term loans combined with lax standards create risk for lenders by increasing the likelihood of negative equity on default. With loan values up and terms extended, more consumers will be upside-down on their existing loan, and upside-down borrowers are more likely to attempt to ‘walk’ or ‘skip’.
Unfortunately for lenders, most repossessed vehicles will have unrepaired damage, and the cost of repairs continues to escalate. Furthermore, lenders can incur thousands of dollars of indirect costs involved with storing, handling, and processing of repossessed vehicles.
CPI enables lenders to transfer the risk of uninsured collateral to an insurer. CPI pays lenders for damage to vehicles they repossess whether or not they make repairs before the vehicles are remarketed and can also provide ancillary coverage for other costs of repossession.
In today’s lending environment, CPI is the smartest choice lenders can make to protect their loan portfolio.