Delinquent Automotive Debtors Easing Downward

CHICAGO – Specks of light are beginning to appear amid the financial darkness. One is the shrinking number of car-buyers who have let their loans go delinquent.

“It's really slowing down,” says Melinda Zabritski, director-automotive credit for Experian Automotive, a credit-reporting firm.

In the latest data from the American Bankers Assn., 3.03% of indirect auto loans (granted by third-parties but originating at dealerships) were delinquent by 30 days. At the end of 2009, those 30-day delinquencies totaled 3.15% – down from 3.53% a year earlier.

The delinquency declines aren’t huge, but they are headed in the right direction.

Delinquencies from direct auto loans (not originating at dealerships) also dropped: from 1.94% to 1.79%, notes Tom Kontos, executive vice president-customer strategies and analytics for the ADESA car auction group.

Experian Automotive, using its own calculation methods, advises that 30-day delinquencies amounted to 2.79% in the year’s first quarter. That’s down significantly from the latter part of 2009 but roughly equal to the figure from a year previous. Delinquencies of 60 days also fell, to 0.78%.

The most serious delinquencies stem from loans that originated in 2006-2007, before the economic turmoil began. Because loan originations have shrunk in the past year or two, keeping more higher-risk buyers out of the picture, there's reason to believe delinquencies could keep easing downward.

Repossessions, on the other hand, have risen a bit. For loans by finance companies, the repo rate during the year’s first quarter was 2.17%. Total repossessions came to 0.77%.

Steven Lambert says Nissan’s delinquency rates dropped significantly.

Loan originations continue to tighten, but there are a “lot of subprime lenders coming back,” Zabritski says at the Automotive Economic Forecast and Financial Forum here.

That's good news for shoppers with flawed credit histories – and dealers trying to finance the credit-challenged, whose ranks have increased to nearly 43 million people in the U.S., according to Fair Isaac Co., a credit-rating firm.

“It's still a bit of a tighter-credit environment,” though “not as bad as it was in the credit freeze,” Kontos says.

But Dann Adams, president of U.S. Consumer Information Solutions for Equifax, reports, “We're continuing to see increases in auto-loan originations, which suggest we may have found a bottom in that category."

Loan-acceptance rates have improved in the past 18 months, says Mike McConnell, vice-president of Nissan Motor Acceptance Corp. Even if they've had difficulty in the recent past, “folks keep coming back and applying for credit.”

Nissan’s delinquency rates have dropped significantly in the last 18 to 24 months, NMAC President Steve Lambert, says.

He offers advice to dealers on what to do if a customer appears creditworthy but still is rejected by a captive lender’s automated system. If that happens, the dealerships should contact the company immediately to explain why the customer warrants a loan.

Nissan uses a “rehash process” that lets those involved take a “close look” at a rejected applicant, to determine if an exception might be appropriate, Lambert says.

At least 40% of NMAC's applications are handled solely by automation, but that leaves a lot of applicants who might deserve personal consideration.

Today's customers typically come into the dealership armed with plenty of information on vehicles that interest them. They aren't necessarily as well-informed about financial aspects of the transaction. People tend to be wary of numbers, and financing details get complicated.

But Lambert says customers need to understand loan terms and interest rates as much as horsepower and fuel economy.

“Dealerships are becoming more transparent,” Lambert says. For instance, some finance and insurance managers position their computers in front of the customer, so all the details can be viewed on the screen.

Dealership F&I staffers should be able to explain those details in a way that is easy to understand.

Conference participants note that nobody wins when an auto loan goes bad – not the lender, the dealership and certainly not the borrower.

As such, the finance experts say dealers need to make sure loan applicants understand exactly what they are getting into, as well as what’s expected of them.

Until such people are actually financed, Lambert says, “the car really is not sold.”