Why Rising Auto Loan Delinquencies Call For A Vigilant Yet Empathetic Approach By Lenders

According to S&P Global Mobility, auto loan delinquencies rose to record levels in the first quarter of 2023. With more than1.69 percent of loans 60 days or more past due, these rates are alarming as they have exceeded the high watermark of 1.46 percent set during the well-documented Great Recession of 2009 and 2010.

Not surprisingly, S&P reports that these increases are primarily in the subprime market.  With higher interest rates, continued inflation in the used car market, and consumers taking on more debt overall, it is something that all lenders should be paying very close attention to as we continue to face economic uncertainty.

I am not here to paint the subprime lending industry in a negative light.  Quite the contrary as I’ve led originations, servicing, compliance, and collections for dozens and dozens of subprime portfolios over the years.  I believe this form of lending will continue to be an integral part of the US economy, offering necessary credit to millions of consumers that fall into this category.

Despite my bullish attitude towards the subprime lending market, I am reiterating the same advice I have provided to the industry when we have experienced similar conditions. And that

advice is that this is no time to wait to see where the market goes next.  It’s time to be vigilant and proactive in your approach delinquencies to balance your own investments while still protecting the interests of consumers.

This vigilance is especially important given that we are still in a volatile and inflationary economic market. The latest data from Lending Club reveals that 60% of Americans live paycheck to paycheck). Inflation, rising interest rates, and increased personal debt create a tenuous cash flow balancing act for just about every consumer, but it is felt the most by those in the subprime market.  They are very often faced with tough decisions about which bills to pay and which to put off.

All too often, I’ve seen lenders wait until delinquencies far surpass acceptable levels and then implement an iron fisted and aggressive approach to collections. This rarely, if ever, works. An experienced and qualified loan servicing team would have had a plan in place long before levels got to this point, a plan that is built on relationship building with borrowers.  And a plan that includes a term that many don’t associate with the collections industry: Empathy.

Why does an empathetic approach built on a spirit of empathy work when addressing delinquent accounts?

In my experience, delinquent borrowers:

• Aren’t Proud Of Their Delinquency: The borrower did not take out the loan with the intention of defaulting and are likely embarrassed and stressed about their situation.  Being insulting or threatening rarely motivates a customer to communicate. In my experience, it will typically have the opposite effect and cause the borrower to avoid your calls.  A bit of empathy and understanding will go a long way in getting borrowers to open up and arrive at a solution.
• Want To Be Heard: There is a personal story behind every late payment. Even if their reasons for delinquency seem irrelevant to an agent, interrupting or rushing them will make them feel invalidated. Listen to your customers and empathize with their situation before driving them away.
• Are Open To Options: A truly skilled loan servicing team will gather information about a borrowers’ particular situation to determine what payment arrangements are realistic from the customer but still satisfactory to the lender. Providing customers with options to cure their account over time versus demanding all at once will increase the likelihood of total default/repossession.  There should be a plan in place to develop these options.
• Want To Be Treated With Respect: Negative or threatening language will rarely be effective and will likely lead to escalations or even complaints to regulatory bodies. Replacing negative language with positive and affirming language is far more effective. Instead of focusing on the late payment itself, acknowledge a customer for having made the first several payments on time or explain the good things that will come along with being current.

If your auto portfolio is experiencing higher than acceptable delinquencies, finding a loan servicing and collections team with directly relatable experience is paramount.  I’ve seen far too many try to do it on their own and play catch up from day one.  With turnover standing at over 70% in the collections industry, the right partner will assume the burden of hiring, training, and retaining the agents needed to cure your portfolios.  XperiSource has this experience and would love to help. Contact us at 949-669-1370 ext. 101 or louis.ochoa@xperisource.com