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Fueled by pent-up demand and rising consumer confidence, automotive sales have increased each year since the recession. Auto lenders have played a key role, helping millions of shoppers replace their aging vehicles with a newer model from a variety of categories. However, as lenders make it easier for car shoppers to purchase and lease a growing number of cars, softening used vehicle values could pose challenges for lenders down the road.
As new sales volumes continue to rise and even exceed the 16-million annual mark, vehicle retention values may deteriorate back to pre-recession levels. Finding opportunities to maintain positive momentum is critical, though, especially for auto lenders seeking healthy profit margins and new areas of growth.
Black Book Lender Solutions introduces a new White Paper that provides guidance for auto lenders: “Black Book Lender Services: Understanding The Importance Of Regularly Monitoring Collateral Risk Levels.”
The White Paper takes a closer look at the reason why regular monitoring of collateral values are similarly important to credit during portfolio analysis and expansion. Why is collateral risk so important to monitor? An excerpt from the White Paper:
Focusing too much on consumer credit could pose a hidden danger to many lenders especially as lenders expand to lengthier loan terms. According to Experian Automotive data in a recent issue of Automotive News, auto loans that ranged from 73-84 months accounted for 12.8 percent of total loans during the third quarter of 2012. This length of loan range represented just 10.3 percent of all loans during the third quarter of 2011.
Lengthy loans represent a heightened level of risk because there is a greater possibility of consumer credit default, and significant vehicle value changes that could impact recovery rates and impact the overall value of a portfolio. While the movement of collateral values in a portfolio is closely monitored in a down economy, many lenders lose sight of its importance during a period of industry growth similar to the current climate.
Vehicle values and retention levels play a critical factor in the overall profitability of a lender’s portfolio. Only focusing on consumer credit leaves a risk manager vulnerable to fluctuating depreciation and the potential for increased loss rates, all impacting the portfolio’s bottom line, as well as the auto lender’s ability to focus on opportunities for growth. Beyond that, regular monitoring of residual vehicle values are essential in forecasting anticipated changes to risk levels on certain segments and models within the same segment.
The White Paper also describes the different layers of risk that auto lenders need to be focused on. The vehicle valuation data collected and analyzed by Black Book can help lenders improve loss rates. These rates can be impacted by a number of risk factors, including fluctuating loan-to-value rations (LTV) as collateral values change, credit score movement and economic factors that affect a consumer’s ability to repay the loan.
Finally, Black Book offers in-depth examples of how vehicle valuation and retention has affected certain segments, including Entry-Level Cars, Luxury-Level Cars, and Truck segments. Based on the data provided, auto lenders can spot segments that offer true opportunities for portfolio expansion.
To view the White Paper email LenderSolutions@BlackBookUSA.com