Auto loan delinquency is a rising problem in the US. Over the last five years, the number of loans that are more than 90 days delinquent rose by 77.7%. Among subprime borrowers, the increase in delinquent loans is the most stark. In 2018, 33% more loans became delinquent than in 2015. By the middle of 2018, America’s auto loan debt had reached $1.06 trillion. Yet at the same time that auto loan delinquency rates are rising, the default rates for mortgage loans have hit rock bottom. It’s important to examine what’s behind these high delinquency rates, and what lenders can do to help reduce them.
The Causes of Auto Loan Delinquency
There can be a number of reasons why someone might default on their auto loan. However, one of the most common causes is simple forgetfulness. Living hectic lives, borrowers can easily lose track of the date and accidentally skip a payment. By the time they realize their mistake, they may have fallen so far behind that accumulated interest and late payment penalties form a debt that is too high for them to repay.
It’s no big surprise that borrowers who set up automatic payments have a 50% lower rate of delinquency. With automatic payments, there’s far less risk of a borrower missing a payment through pure absent-mindedness.
What about those borrowers who don’t have auto-pay set up?
First, they’ll receive reminders about upcoming or recently overdue payment using phone calls, text messages, and emails. If reminders don’t work, the loan servicing agent tries to make contact with the customer to collect the payment. But this is easier said than done. Only 40% of auto loan payment collections are successful.
Why Does Auto Loan Payment Collection Have a High Rate of Failure?
While servicing agents have everything they need to collect payment readily to hand, the same can’t be said of the borrower. Borrowers are typically out and about, easily distracted, and occupied with half a dozen other tasks at the same time as talking to a loan agent. Completing an auto loan payment requires a great deal of time and effort for the borrower.
Successfully collecting payment requires multiple touchpoints and actions:
- Viewing proof of an overdue payment
- Verifying the borrower’s identity
- Discussing the remaining balance amount
- Demonstrating the borrower’s income and expenditure expectations
- Calculating a realistic repayment schedule
- Ensuring regulatory compliance
- Securing the borrower’s agreement to the new repayment terms
- Collecting the borrower’s signature
- Receiving secure payment
The customer might need to use their email, phone, printer, scanner, text messages, a separate app, and possibly even snail mail in order to do all these things. All this is at a time when tasks in other areas of their lives are carried out faster, with one touch, over mobile. It’s understandable that 67% of customers report being frustrated by the process of making auto loan payments.
How to Improve Successful Loan Collection Rates
There is a way to use technology to improve auto loan collection. Using a collaborative platform with simplified, interactive tools for real-time coaching and instant consent has been shown to improve collection by 25%, speed up the process by 80%, and bring about a 65% improvement in customer response.
1 Real-time coaching
Using a collaborative platform like Lightico allows the loan agent to discuss the payment process in real time and guide the borrower through the complex process of auto loan payment. The ability to share images and documents means that the loan agent can show the outstanding balance and current repayment schedule. It also allows the borrower to quickly verify their identity, and share their income and expenditure to prove their ability or inability to meet the current repayment schedule.
Real-time, in-platform collaboration enables agent and customer to discuss and agree on a new, realistic balance repayment schedule. With a repayments calculator, the agent can demonstrate typical weekly or monthly repayments, show the breakdown of interest, and illustrate the total amount to be paid, without interrupting the flow of communication.
2 Simplified forms
Long, complicated PDF forms are a huge obstacle to the borrower. They need to be downloaded, completed, and then scanned in or uploaded again, requiring numerous touchpoints. It’s easy for errors to creep into a form that has many detailed fields.
Loan agents meet with more success with an interactive, fillable, simplified mobile form that can be completed instantly, from any device. This way, customers can complete income and expenditure forms while still connected with the agent. The loan agent can immediately respond by adding details about the amount and frequency of payments. Both sides can see the information and make corrections instantly. Direct debit agreements can also be filled in and signed securely without leaving the platform.
3 Instant consent
Forms, and ACH (direct debit ) instructions can be easily captured, and when applicable these documents can be legally signed with a finger swipe. There’s no need for the customer to download, print, sign, scan, and upload a document. They simply swipe to sign then and there.
The Customer Who Cannot Pay
The above process is very effective for borrowers who just need help completing a payment, or require an easier repayment schedule. However, many customers, especially subprime borrowers, took out an auto loan during better economic times, but then found they couldn’t keep up with repayments. With these customers, the problem isn’t that they forgot to pay or need an easier repayment schedule – they simply cannot make the payment right now.
The Many Obstacles to Loan Deferment
It’s rare to find a borrower who wants to default on their auto loan. On top of the risk of losing their car to repossession, defaulting on a loan has a big, negative impact on their credit rating. So most borrowers are delighted to choose the alternative of deferring payment. Deferment can involve refinancing the loan at a lower interest rate, extending the term to allow for lower monthly payments, or agreeing to skip a certain number of payments and attach them to the end of the term instead.
The trouble is that deferring loan payments involves just as much paperwork and just as many touchpoints as collecting an auto loan payment. The loan agent needs to:
- Confirm the borrower’s identity
- Show the borrower the outstanding balance
- See proof of the borrower’s inability to pay – i.e. income and expenditure – and reasons for asking for a deferment
- Draw up a new loan agreement or forbearance agreement that details how many payments can be deferred, the new payment schedule, any changes to the loan terms, and any penalty fees
- Share the new agreement with the borrower and confirm that they accept it
- Receive signed consent to the new loan terms
How to Decrease the Amount of Work Put Into a Loan Deferment?
Once again, tech delivers the solution. The same platform that speeds up and streamlines auto loan payment collection also improves loan deferment. With a collaborative, interactive platform, the borrower is able to share proof of income and expenditure and documents that support their extenuating financial circumstances, such as having lost their job or a sudden death in the family.
In response, the loan agent can discuss the best loan deferment solution with the borrower. They can view and consider different repayment schedules, the impact of deferred payments, and various terms extensions together, in real time. The loan agent can also use visuals to illustrate the borrower’s options.
By simplifying the necessary forms and using auto-fill options, updated details can be completed faster, and with fewer errors. With the agent present throughout, the borrower can immediately ask for and receive an explanation about any confusing fields or questions.
Finally, swipeable finger signatures mean that the loan agent can gather legal consent instantly, without requiring the borrower to download, sign, and upload the form again. By removing roadblocks to deferment and easing customer frustration, loan agents can reduce default rates and increase deferment uptake.
Tech Can Help Reduce Auto Loan Delinquency
The worrying rise in auto loan default rates is made worse by a long, complex process for both auto loan payment collection and auto loan deferment. Borrowers who are accustomed to smooth, fast, mobile task completion are deterred seeking deferment and fall into loan delinquency by accident, out of inactivity. By simplifying forms, reducing touchpoints, and enabling real time loan agent collaboration, technology like Lightico removes the obstacles to successful loan payment and loan deferment to help reduce the rate of auto loan delinquency.