Both Sides Lose in Vehicle Repos

Auto lenders are cutting slack for borrowers struggling through these tough economic times, but it’s not sheer altruism. Instead, it’s mutually beneficial.

By offering so-called forbearance or repayment relief to debtors who have lost their jobs or otherwise have been ill-affected economically by COVID-19, creditors are trying to keep people out of default.

“The last thing a lender wants is a repossession,” says Amy Crews Cutts, president and chief economist of AC Cutts & Associates. “When borrowers stay afloat and are able to resume their payments, everyone wins, lenders and borrowers.”

Conversely, both sides lose in a repo. Borrowers lose their vehicles. Creditors lose money on a loan default even after re-selling a confiscated vehicle.

Forbearance takes the form of loan deferments or restructuring, depending on the lender. “About five million auto loans have forbearance of some kind,” Cutts says during a webinar entitled, “Potential Impact on the Automotive Industry in the Wake of Uncertainty,” put on by credit tracker Equifax.

Who is getting COVID-19 hardship accommodation?

The largest number (1.6 million) are people whose auto loans originated last year. That’s followed by 1.26 million for 2018 originations, Cutts says.

By credit score, 2.3 million people in the relatively high range of 660-779 lead the forbearance pack. Length of most forbearance-related loans (3.34 million) are six years.

Automakers’ captive lending arms offer the most forbearance (3.34 million), followed by banks (1.63 million) and credit unions (1.2 million).

All things considered, auto-loan performance is OK: Equifax says only 2% of loans are 30 days past due and 1.75% are 60 days behind.

“Auto loan delinquencies are trending down, but at a slower pace than the seasonal norm,” Cutts says, adding that lending has become more conservative since early March.

“The auto credit markets are not showing signs of distress,” says Byron McDuffe, senior vice president and general manager of Equifax’s automotive services.

But, he adds, if repos surge post-forbearance (something Cutts doesn’t anticpate), used-car vehicle values fall and rental vehicles flood the remarketing industry, “the market couldn’t handle that well.”