when it comes to revealing default statistics. The Finance &
Leasing Association, the aggregator of its members’ arrears
figures, refused once again to discuss the situation or release any
figures to Motor Finance relating to defaulting motor loans.
The US, by comparison, is altogether more open with regard its
default statistics. Whilst it does not ‘sweep the mess under the
carpet’ like its UK counterpart, as a foretaste of what is starting
to happen to UK motor lenders the pattern makes for grim
reading.
Go deeper with GlobalData
Access deeper industry intelligence
Experience unmatched clarity with a single platform that combines unique data, AI, and human expertise.
As the US economy continues to struggle, automotive arrears are
steadily increasing with around $25bn (£15.5bn) worth of loans
reported to be on an overdue basis as at October 2008.
Current analysis by Experian Automotive, comparing Q2 2008 to Q2
2006, showed that US car loans overdue by 30 days are up 9 per cent
year on year, whilst loans 60 days overdue are up by 11 per
cent.
The largest group at risk, both in terms of number of loans as
well as balances in default, are independent finance companies. At
the end of Q2 2008 some 604,967 loans (worth over $7.5bn, £4.6bn)
were 30 days in arrears. The next largest arrears grouping, captive
finance companies, held 531,663 loans (worth $7.53bn, £4.7bn)
whilst bank automotive lending at 30 days in arrears totalled
278,000 loans (worth $3.5bn, £2bn) and the smallest group, credit
unions, held 181,770 loans worth over $2bn (£1.2bn) in arrears.
Across all lending groups in the US, the average 30-day arrears
rate is 2.48 per cent with an average default loan balance of
$12,979 (£8,100) (see chart 1).
Despite having the third lowest default balance of $12,510
(£7,818), the high default rate of 4.63 per cent in the independent
finance company segment represented the largest 30-day default
group.
In the US the 30-day default rate is cyclical in nature. As seen
in the last several quarters (see chart 2) the rate rises
from a first quarter low throughout the year.
Year-on-year, the Q2 2008 default rates have increased 9 per
cent from 2.28 per cent to 2.48 per cent. The largest default
increase is in the credit union sector which experienced a 13 per
cent increase in 30-day default bringing its arrears rate to 1.31
per cent in Q2 2008. Both the captives and banks experienced 12 per
cent increases resulting in 2.75 per cent and 1.53 per cent rates
respectively. While independent finance companies have the highest
default rate among the lender groups, from Q2 2007 to Q2 2008, at 2
per cent they experienced the lowest increase in arrears.
60-day defaults surge
The 60-day default car-loan sector represents loans that are
between 60- and 79-days in arrears. While this is a smaller sector
than the 30-day default market these loans are more likely to reach
a major derogatory status – such as write off. (See chart
2)
At the end of Q2 2008, some 0.75 per cent, or 483,392 of all
open motor loans in the US were 60-days in default – an increase of
11.9 per cent from Q2 2007. The total amount of these loans is over
$5.9bn (£3.6bn).
Credit unions, whose portfolios are made up of mostly prime
customers, experienced the largest increase in default (See
chart 4).
By the end of Q2 2008, some 0.38 per cent of all credit union
loans were 60-days in default – a 22 per cent increase from the
previous year. While their arrears rate is the lowest in the
industry, there is over $578m (£361m) at risk for this sector, with
the industry’s lowest average amount in default, coming in at
“only” $10,978 (£6,861).
By Q2 2008, some 0.59 per cent of all captive loans were 60-days
in arrears, an increase of 18 per cent. Captives also traditionally
finance larger balances than the other lenders and have the highest
average balance on default loans, $13,979 (£8,736), resulting in
over $1.5bn (£937m) being currently at risk.
Independent finance companies have the highest default rate
among the lenders at 1.78 per cent – a 6.6 per cent rise in 60-day
arrears from Q2 2007. Due to the high default rates, independent
finance also have the largest amount at risk – over $2.7bn (£1.6bn)
in motor loans were in arrears by the end of Q2 2008.
UK arrears not going away
Despite the UK industry’s customary shyness to admit to rises in
arrears, some patterns are emerging that compare unfavourably with
lenders in the US. It is believed that 30-day-plus arrears for
direct loans, covering all consumer assets, were sitting at around
12.5 per cent this July – a 24 per cent increase compared to June
2007 when they were 10.1 per cent. Hire purchase loans at the
30-day-plus arrears stage showed a 10 per cent rise in July to 7.9
per cent (June 2007: 7.2 per cent).
Also, as the amount of total receivables declines on any
portfolio – with lenders cutting back on the number of loans
accepted, and tighter credit underwriting generally – then the
percentage of balances in arrears as a proportion of total
receivables will inevitably increase.
Whilst acknowledging the secretive nature of the UK lending
industry in such matters, Neil Munroe, external affairs director at
Equifax tells Motor Finance: “It is fair to say that all portfolios
are experiencing rises in default levels, especially over the last
three months.”
Munroe confirms that those motor lenders who have security in
the assets they have financed have been somewhat slower than
unsecured lenders to address the problem of tackling the rise in
arrears. “However,” he adds, “it has dawned on them that arrears
are not going away and they are now seeking to address the
problem.”
Finding the debtor “not always enough”
With many motor lenders’ back-office debt collection departments
suffering from years of under-resourcing, and with legacy
technology, Munroe confirms that some are playing smart as the
recession deepens.
“In such difficult times,” he says, “it is crucial for
collections teams and debt recovery companies to use the most
accurate and effective solutions to identify the correct person for
the recovery of outstanding debts. But finding debtors is not
always enough – it’s knowing that they have the money to pay. And,
of course, the biggest problem facing the credit and collections
industry is that every debtor behaves differently.”
He explains: “There are ‘can’t pays’ and ‘won’t pays’ and
clearly it is vital to be able to differentiate between these so
that resources can be effectively applied to maximise collection of
outstanding debts.”
The new Equifax Debtor Management Solutions package provides a
range of easy-to-use tools that improve the chances of recovery and
also improve the efficiency of the recovery teams.
“These latest enhancements,” Munroe explains, “include the new
version of Equifax Locate, which aims to increase the chances of
finding missing debtors and help collectors to identify those
debtors on which it is worth applying resources for recovery – all
of which is going to be vital as we face some challenging economic
conditions over the next year or so.”
In addition, Equifax’s Insolvency Navigator gives lenders an
insight into the profile of those borrowers who are most likely to
become insolvent. Munroe says: “It provides an additional filter
for new credit applications, as well as enabling more effective
cross-sell activity by removing higher-risk individuals from new
offers. It also plays a crucial part in on-going account
management, including identifying candidates for credit-limit
freeze, or reduction.”
Read more:
