A new Open Lending report found a majority of financial institutions are seeing increased delinquency rates across borrower demographics. More people are feeling the squeeze of continued inflation, recurring interest rate hikes and the end of pandemic stimulus checks and child tax credits. These issues, along with the recent turmoil at banks nationwide, have created a perfect storm for delinquencies to flourish.
But despite such a contentious environment, financial institutions can lower their risk while still providing necessary funds to borrowers by adopting lending enablement solutions.
The combination of the initial increases in consumer savings and the government fiscal stimulus and relief programs resulted in low delinquency rates on car loans during the first two years of the pandemic. According to the U.S. Bureau of Economic Analysis, the personal saving rate over the last quarter of 2022 averaged under 4 percent, less than half of what it averaged pre-pandemic and only 20 percent of the average personal saving rate throughout the first 24 months of the pandemic.
The winding down of government stimulus and relief programs that COVID-19 ushered in, coupled with steep increases in inflation and 10 consecutive Federal Reserve rate increases in a year, have cumulated in consumers making late payments on their car loans. Automotive loan delinquencies are back up to or surpassing pre-pandemic levels, according to Experian. And in the third quarter of 2022, the total automotive loan debt rose to a record $1.52 trillion, an $81 billion increase from the previous year. These numbers show a highly tangible impact on millions and the dream of car ownership potentially drifting further out of reach for more people.
Financial institutions of all sizes are seeing this upward trend for delinquencies this year. Fifty-eight percent of financial leaders have seen a notable rise in delinquency rates, according to new research from Open Lending.
Traditionally, those looking for the best rates will bypass car dealerships in favor of a credit union or community bank. But given the recent banking crisis triggered by Silicon Valley Bank and Signature Bank failures, lenders of all sizes are reevaluating their criteria, watching their balance sheets closely, as well as reassessing their asset and liability management strategy.
Open Lending found that 76 percent of all financial institutions, regardless of size, are more focused on minimizing delinquencies than in previous years. Delinquencies are also spanning credit tiers, according to respondents. Thirty-three percent reported a rise in mostly prime borrowers, while only 20 percent in near prime.
By expanding their near-prime borrower base, lenders can offset potential volatility among prime borrowers and avoid downward pressure on their yield and portfolio performance. And this step doesn’t have to be a risky one. Lending enablement solutions, now more than ever, should be a critical component of a lender’s asset and liability management strategy so they can balance the need to safely navigate the swirling waters of increased balance sheet scrutiny, rising rates and higher consumer delinquencies while also meeting the needs of prime and near-prime originations.
The value of lending enablement solutions was a key theme in Open Lending’s research. A much greater proportion (95 percent) of lending enablement users reported meeting their return-on-assets targets last year compared to nonusers (73 percent). Lending enablement users (12 percent) were also far less likely to see a rise in delinquency rates among those in non- and near-prime categories.
When looking for a lending enablement solution, your goal should be to find one that broadens your borrower base while narrowing your exposure to unnecessary risk. Given the dynamic nature of the economy, key areas to evaluate any lending enablement solution are the depth of the data they utilize, the breadth of time over which they have been analyzing that data and the proven track record of their AI and machine learning capabilities.
We’re all looking for a clearer path to stability for the financial and automotive sectors. Unfortunately, we could be waiting a while. New hazards are going to emerge. As we navigate this continued uncertainty, capable lending enablement solutions can bring you and your customers what may seem increasingly out of reach: assurance and opportunities.