Auto lending has been on the rise in recent years, as more and more people have opted to take out car loans rather than pay for a car outright. This has led to a corresponding increase in defaults on those loans. But there may be ways to reduce those defaults and keep the American auto industry afloat. First, it’s essential to understand why people default on their loans.
Why Are People Struggling to Make Their Car Payments
Here are some of the most common reasons:
Job Loss or Reduction in Hours
The first and most common reason people default on their car loans is that they suddenly find themselves without a job or with reduced hours at work. This can make it challenging to keep up with the monthly payments, especially if the loan is already tight.
Of course, job loss is often tied to the economy’s overall health. When there’s a recession, people are more likely to lose their jobs or have their hours reduced. This can make it difficult for even those employed to keep up with their car payments.
With the rising cost of living, many people find it challenging to keep up with their current expenses, let alone make a car payment. This is especially true for those who are already living paycheck to paycheck.
Any of these factors can lead to a default on a car loan, but often it’s a combination of several that push people over the edge. So what can be done to prevent defaults?
Lenders Can Take Steps to Reduce Default Rates
There are several things that lenders can do to reduce the number of defaults on car loans.
Be More Selective With Borrowers
One way to reduce defaults is to be more selective with borrowers in the first place. This means looking at a potential borrower’s credit history, score, employment history, and income. If borrowers have a history of defaulting on loans, they will likely do so again.
If a borrower has a low credit score, that’s also a red flag. A low credit score indicates that the borrower is a high-risk customer. Lenders should also take into account a borrower’s employment history. If a borrower has had several jobs in a short period of time, that could be an indication that they are not stable.
Finally, lenders should look at a borrower’s income. If a borrower doesn’t make enough money to cover the cost of the loan, they are more likely to default.
Offer Flexible Loan Terms
With flexible loan terms, borrowers have the option to make smaller monthly payments or extend the life of the loan. This can help borrowers who are struggling to make ends meet.
If a borrower knows that they can make smaller payments for a longer period, they may be more likely to keep up with their payments.
Flexible loan terms can also help borrowers who are worried about losing their job. If borrowers know that they can make smaller payments for a longer period, they may be more likely to keep up with their payments even if they do lose their job.
Use Technology to Monitor Borrowers
Lenders can use technology to monitor borrowers and identify those who are at risk of defaulting.
For example, lenders can use GPS tracking to track a borrower’s location. If a borrower is consistently late on their payments, the lender can see that and take action.
Lenders can also use car disable devices to disable a car if a borrower misses a payment. This can help lenders get their money back and prevent borrowers from continuing to rack up debt.
Educate Borrowers on the Consequences of Defaulting
Many borrowers don’t realize the consequences of defaulting on a loan. Lenders can help educate borrowers on the consequences of defaulting, such as damage to their credit score, the repossession of their car, and legal action.
If borrowers are aware of the consequences, they may be more likely to make their payments on time. This is especially true if they know that their car could be repossessed. You can bet that they’ll be more likely to make their payments if they know their car is at risk.
The bottom line is that lenders need to take steps to reduce the number of defaults on car loans. By taking some of the steps listed above, lenders can help reduce defaults and protect their investments. So if you’re a lender, don’t wait – take action to reduce defaults today. You’ll be glad you did!