May 16, 2008

Kinder, Gentler Vehicle Repossessions?

We hear a lot about the home mortgage crunch these days, but car loans aren’t faring much better. Delinquency rates for automotive loans are on the rise, with the 60 days past due category rising 25 percent between the second and fourth quarters of 2007, according to TowerGroup, an expert on consumer lending practices. That’s not good news for consumers caught in the crunch, but help might be on the way from an unexpected source: the lenders themselves.

New research from TowerGroup suggests that maintaining the status quo in current collections practices is no longer an option for automotive lenders. Change will be mandatory to help lenders survive current market conditions that are creating a sharp increase in collections volume, and those changes could give borrowers in trouble a second chance.

Despite rising delinquencies and stories of doom in the credit markets that fill the media, the reality is that lenders do not want to repossess cars -- and automobile owners want to keep their cars. Unlike some real estate investors, auto buyers don’t speculate on auto purchases hoping for appreciation in value, and they don't try to “flip” the car to make fast money. They simply want transportation, though some do buy “more car” than they can afford.

Because auto loans are typically based on a fixed interest rate and a fixed monthly payment, a delinquent payment is most often a sign of trouble in other aspects of a consumer's financial health, TowerGroup said. Auto lenders must take care not to ignore these trouble signs and instead dive right in to address delinquency problems on a number of fronts immediately if they want to avoid increased delinquency rates matching those of the mortgage industry.

The TowerGroup research report, titled “Stay in Your Car Ma’am: Best Practices in Automotive Finance Collections” and authored by Bobbie Britting, a senior analyst at TowerGroup, suggests ways for automotive lenders to rethink delinquency, default and collections practices -- providing insights to help them grapple with the growing volume of delinquent accounts and the challenges associated with keeping borrowers in their vehicle.