The pandemic-caused lockdown forced Americans to stay home to avoid even the possibility of getting an infection. Living in the new normal, they reconsidered their daily routine, working remotely and applying to delivery services more often.
At this point, many began wondering if conventional car borrowing would be affected. After all, an automobile is the widespread means to get to the destination point. Yet, with the pandemic, people grew more cautious about going somewhere, now considering if taking a ride is worth taking the risk every time.
And the answer is: auto loan debt climbs another height of $1.37 trillion, as reported as of the end of 2020 — an increase by $80 billion, or 6% from 2019. From this growth, we may conclude that despite the changes in people’s daily travels and commuting, automotive financing hasn’t been hit that much compared to other consumer debts.
The average auto debt balance also grew but only by 1% more than the rate of 2019. However, car loan consumers didn’t have clear guidance on how to repay car loans, in contrast with student loan repayments. As a result, they had to find their own ways of recovering loans through refinancing, selling a car, trying to renegotiate loan terms with lenders, or taking other actions.
However, the above stats are primarily for lenders so they will know that they are not alone in their challenge to collect auto loans post-pandemic.
How are Car Loan Interest Rates Calculated?
Auto loan lenders calculate loans either as simple interest car loans or as precomputed interest.
In most cases, simple interest loans are provided, meaning that a consumer must pay the amount of interest each month calculated based on their loan balance on the day the payment is due. If you pay more than the allowed minimum, you may decrease the interest owed. Part of the monthly payment goes to the principal, and the other part covers the interest charges.
In the case of precomputed interest, the interest is calculated in advance based on the borrowed amount. That amount goes to the principal, divided by the number of months in the repayment term to calculate the consumer’s monthly payment.
However, here, there’s no distinction between principal and interest payments. If the consumer pays more than the minimum due, makes extra payments, or handles the situation by paying off a car loan early, they won’t save on interest as much as they could with a simple interest loan.
Based on the data provided by the Federal Reserve, in the Q1 of 2021, the average rate of a 48-month auto loan was 5.21%, and for a 60-month auto loan, it was 4.96%.
We see that among various types of debt, car debt is considerably high. But collectors lack advice on how to collect debts at these turbulent times. Next, we will share actionable tips on what you can do when the debt on the provided auto loan approaches the tipping point.
Collecting Auto Loans: Best Tips
Leverage Various Credit Scoring Sources
There should be no universal approach to collecting auto loan debt simply because each debt situation and, respectively, debt balance is different. Rather, you should make decisions using the collection, risk, or recovery scoring models. Pool scores from internal systems, credit bureaus, or even both at once.
Ultimately, carefully thought-out account scoring will improve your collections as you will know which accounts to prioritize depending on the expected outcomes; the likelihood of recovery and the approximate amount to be recovered. More specifically, credit scores may reflect a consumer’s ability to pay, the likelihood of making a payment in the next 30 days, and even the most effective means of contacting the consumer (for example, by email or phone).
Implement a Multi-channel Strategy
Digitized debt collections help you quickly achieve collection goals. Indeed, now, digital channels are the most convenient way for lenders to get in touch with consumers. At this point, one should consider integrating consumers’ contact preferences and their behavioral segmentation into debt recovery planning.
So, use the right debt collection software that provides Machine learning-based advanced analytics to deliver tailored messaging to each consumer and even automate the debt collection procedure. You can achieve this through scheduling and automated billing tools to successfully collect debt without making irritating phone calls. Advanced data analytics can help you identify and differentiate consumer types based on their behavior and preferences, so you will know-how and, most importantly, when to approach the consumer so debt collection will most likely turn into success.
Provide Alternative Payment Options
An ideal goal of any collection is to fully collect a loan from a client as quickly as possible and keep good relations with the client at the same time. The collection process revolves around the consumer and should start and end with them. Consider making that process even more “consumer-oriented,” meaning that you should carefully analyze each client’s situation and offer a payment plan that is affordable to them.
Make sure you offer payment alternatives that differ by payment duration, quantity, and sums to suit the consumer’s wallet. The relevant process automation tools will be of great help; choose the ones that calculate individual payment plans based on the consumer’s credit history. Thanks to this feature, you can always be sure consumers get affordable repayment options to choose from.
Offer Payment Adjustments
An average consumer earns around $40,000 per year. Large lenders typically deal with wealthy consumers with annual income ranging between $40,000 and $50,000 who ask for a loan to get a new car. However, approximately one-third of all these consumers own homes, yet, they don’t pay the auto loan anyway.
Why? Usually, they can’t because they are temporarily unable to do so, for example, because of unemployment followed by finding a new job. Or, they have a reduction in their household income, for example, after one of the spouses lost a job. As a result, they can’t make the same large payments they did before or catch up on their past payments.
At any rate, our point here is: consider changing repayment sums (again, we are talking about payment alternatives) to fit the consumer’s budget. With the proper payment adjustments, they can easily get back on track.
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