While offering loans can provide increased profitability for credit unions, there are some potential downfalls and risk when it comes to the lending industry. In recent years, the auto-loan and credit card industries have seen a rise in delinquencies. And, of course, this is never a good thing for financial institutions.
With a strong economy and an increase in jobs and wages, consumers have more confidence when it comes to their spending habits. These spending habits have impacted the number of loans that lenders are offering to borrowers. While this opens up opportunity for more business, it also increases the risk that lenders face. Lenders must be prepared with a well, thought-out plan to collect on delinquent accounts.
Auto Loan Delinquencies
Delinquencies in the auto loan landscape are the highest they’ve been in the past decade. According to the New York Fed’s recent blog post, 2018 was marked by historically high levels of newly originated loans in the auto industry, with $584 billion in new auto loans and leases showing up on credit reports. At the end of 2018, more than 7 million American borrowers were behind on their auto loans by 90 days or more.
Borrowers under the age of 30 and low-income borrowers have been defaulting with greater frequency than average. Existing financial obligations, such as student loan payments, may be putting monetary strain on the under-30 population, and a marked increase in the average price of new vehicles over the past several years may be contributing to the growing number of distressed low-income borrowers. According to Kelly Blue Book, average new car prices have been rising by 2% year-over-year.
When borrowers can’t afford to or don’t make their auto loan payments on time, it can take a toll on a lender’s bottom line. But, these trends are not limited to the auto industry; delinquencies are on the uptick when it comes to credit cards as well. So, what does this mean for credit unions? It means that no matter how diligent or conservative your lending practices may be, it is inevitable that some borrowers will default on their loans.
Credit Card Delinquencies
Consumers happy about the prosperous economy see no reason to say “no” to new debt, and they may be biting off more than they can chew when it comes to charging purchases to credit cards, especially if interest rates rise.
According to TransUnion, the lending industry must watch their accounts, as signs point to increased credit card delinquencies. Leading indicators suggesting this concern may be warranted are as follows:
- The number of credit card accounts that are 90 days delinquent has increased steadily every year since 2014.
- According to the New York Post, the May 2018 increase in revolving debt was the biggest increase since 1995.
- Average amounts owed on credit cards increased $650 per household since last year.
- Household debt levels are “hovering near record highs,” according to Reuters.
- If interest rates rise, charged purchases and payments that originally appeared manageable can become difficult for debtors to pay, especially as late fees and penalties are added.
For lenders, an increase in credit card delinquencies is an expensive proposition, since, as we know, the more delinquent an account becomes, the smaller the chance you’ll be repaid at all. Statistically speaking, financial institutions will see repayment from only 20% of accounts that have been delinquent for more than 180 days, according to The Credit Research Foundation.
Preparing Your Credit Union for Rising Delinquencies
One proposed solution to rising delinquent accounts is to tighten lending guidelines to mitigate the number of delinquencies that your credit union encounters. Another major factor for consideration with the rise in delinquencies is how lenders will begin to collect from delinquent borrowers.
While many lenders opt to keep their collection efforts in-house, there are numerous benefits to outsourcing collections. Outsourcing collections allows credit unions to shift their previously committed focus to:
- Expand on areas with potential growth and focus on the overall strategy to increase their bottom line
- Eliminate resources focused on back-office processes and utilize that time on efforts that build and grow member relationships
- Allow employee growth by opening more opportunity to focus on specialized areas other than collections
Outsourcing collection efforts can be a game changer for many credit unions. Whether it be all or a portion of their collections, outsourcing allows you to increase your productivity and reduce costs. It can cost a third-party collections team five to 10 times less to collect a dollar than it would cost a credit union.
It’s unclear how long the rise in delinquencies will linger so make sure that you take the proper measures to ensure that your collections strategy makes sense for your credit union.
Whether you keep collections in-house, outsource a portion of it, or outsource all collection efforts depends on your lending portfolio, but investing your time to find the right option for your institution will save you time and money in the long run.
Have you evaluated your credit union’s collections operation lately? Take our self-assessment, A Guide to Auditing Your In-House Collections.