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Is auto finance stabilizing in 2024?
Payments and loan amounts, sub-prime borrower difficulties, delinquencies, the increasing costs of doing business, and opportunities for digital shifts are all top of mind for auto loan servicers and collectors.
Now that the Q4 2023 reports are out, trends and predictions for auto finance in 2024 are coming at you fast. Let's go over the information so you can plan.
Q4 2023 delivered a softening of average monthly payments.
That’s not to say they didn’t increase. Edmunds reports that monthly payments for new cars climbed slightly to $739. Used was essentially unchanged at $561.
The total loan amount for new cars is down slightly year-over-year, which reflects the rebalancing of supply.
So looking forward, maybe we'll see fewer delinquencies, especially as interest rates are expected to continue to drop and supply continues to increase.
But as for right now? Things are more complicated.
If generally Q4 brought good news, the picture for sub-prime is a little different. Those riskier borrowers are more likely to head into delinquency by definition, and the market for them is still an area for caution.
In terms of monthly payments, says Experian - sub-prime (including deep sub-prime) is a different story. It’s worth looking at their visual (click the image to download the whole report).
And while used total loan amounts fell across all risk segments, again, sub-prime and deep sub-prime had a different story.
Looking forward, we'll expect even these risky segments to be facing an easier market, but as for existing loans, sub-prime will continue to be…well, risky.
Not to say we told you so, but…
In Q3 2023, the percentage of sub-prime borrowers 60 days past due on their auto loans reached the highest level since 1996, says Bankrate.
In Q4, the percentage of all borrowers who were 30 or more days delinquent on their auto loans soared to 7.7%, the highest since 2010, Investopedia added.
Between elevated car prices during the pandemic shortages and high interest rates, borrowers are being squeezed tightly.
And added to that, Auto Finance News calls out the complexity and increased costs of repossessions, making it critical for loan servicers to keep payments on track.
As the AI revolution continues, there is still plenty of room for innovation in auto financing.
Automotive News reports that a Wolters Kluwer survey of 2,200 dealers, lenders and service providers “found that 77 percent of auto financers who rely on manual or paper processes in auto deals had errors in at least a third of them.”
Tim Yalic of Walters Kluwer wasn’t surprised by this finding. When it comes to people, “we could do the same thing over and over, and we are still going to mess it up."
That means despite advances in using technology to improve everything from originations to fraud prevention, there’s still plenty of room for change.
Shantanu Gangal, CEO of Prodigal, which provides operational and strategic intelligence for consumer finance teams including auto financing, agrees.
“Anything you are doing several times a day or that you spend several hours in a month doing is something you should figure out how you can automate and build strategy from.”
2024 is seeing a continued push of new technologies to improve strategies and workflows, so we expect those trends will continue.
Cox Automotive expects that new vehicle supply will normalize in 2024. That will pass some benefits along to buyers, including the continued upswing in incentives and discounts.
But MSRPs and invoices are expected to level up overall costs, thanks to increased labor and materials costs.
Cox also predicts 1% growth in the used car market.
Auto Finance News reports that 2024 should be a buyer’s market, which means newer loans may be at more manageable levels, leading to fewer delinquencies, at least for this originations vintage.
With total household debt hitting a record high of $17.5 trillion, with increases across credit card balances, mortgages, and auto loans, consumers are going to need to make tough choices on payments.
And delinquency news is worrisome.
2023 saw a year-over-year increase of 101% in credit card write-offs, and according to our exclusive interview with Anand Joshi, former VP of global collections at American Express, we can still expect another 30-40% increase over the next two quarters as delinquencies move into fully-fledged charge-offs.
So auto finance for the future looks better, but managing the loans that were taken on during the past few roller coaster years of the pandemic may be more difficult.
Auto loan servicers will be looking for ways to improve operational workflows and find transformative strategies to keep up with shifts in the market.
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