With a majority of the country under orders to stay home due to COVID-19, there has already been a dramatic drop in auto sales, miles driven, and accident frequency. As many states further extend shelter-at-home guidelines through the end of May or longer, the pandemic is likely to have a long-lasting industry impact.
For automotive lenders, the implications are already becoming clear. Call duration is up 50% as worried consumers reach out about loans, overwhelming call centers and limiting lender availability. Meanwhile, total loss resolution remains a time-consuming process, further stretching resources as lenders adapt to a fully remote working environment.
How did we get here?
Before the COVID-19 pandemic, auto loans were increasing in number and length. Consumers were purchasing cars with up to seven-year loans, extending beyond the typical three-year vehicle maintenance warranty.
In fact, according to Experian, the average loan term length in the U.S. is just over 69 months, and 85% of new vehicles are purchased with financing. That means a large share of vehicles up to six or seven years of age likely have an outstanding loan balance.
With more than 40 million Americans filing for unemployment since mid-March, consumers may find themselves defaulting on loans or refinancing as they look to stretch limited income across competing priorities.
Negative equity already hit record highs in April, making up 44% of new vehicle sales — an average of $5,571. These numbers are likely to climb even higher as unemployment rates increase and markets struggle to regain traction.
Many could be facing prolonged unemployment while the economy reopens and adapts to the “new normal” — whatever that may be. And with impending bills to pay and families to support, more and more consumers will turn to lenders for loan help and guidance.
Total Loss Rising
With fewer cars on the road and, subsequently, fewer accidents, it’s no surprise that claim counts are down. But even with lower overall claim volume, the percentage of total loss claims continues to increase.
Older vehicles still make up the majority of total loss claims, but with rising repair costs the last several years, total loss frequency is increasing across all vehicle ages.
Perhaps most concerning is the increase in total losses among newer vehicles, where many customers still have outstanding auto loans. For example, 7.8% of current model year vehicles in Week 13 of 2020 were flagged total losses versus 5.6% the same week in 2018.
With a looming decline in new vehicle sales as well as a potential drop in used vehicle and vehicle retention values, total loss frequency is likely to rise further, just as it did during the Great Recession.
What does this mean for lenders?
Outstanding loans and negative equity could leave even more consumers underwater as unemployment rises. And while consumers look for ways to redistribute cashflow, lenders will continue to see an increase in call times related to late payments and loan refinancing.
With increased call duration and overwhelmed call centers, lenders have limited time and resources to devote to total loss resolution. Carriers seeking lien release information are kept on hold longer as lenders prioritize consumer calls.
While carriers wait on hold, total loss resolution time extends for a process that already takes an average of 73.7 days from loss to salvage — 62 of which take place post-valuation. The vehicle continues to depreciate while consumers grow more frustrated.
Even after the shelter-at-home order has lifted, lenders should evaluate if their processes are built for a continued rise in total loss claims — particularly for new and young vehicles — as vehicle prices continue to soar.
In part two of this blog series, we’ll explore how digitizing total loss processes can help lenders save time and keep information flowing. And with the sudden reliance on remote work, now is the perfect time to implement digital solutions.
Stay tuned for more in 4 Easy Ways for Auto Lenders to Improve Total Loss Efficiency. Or visit our Total Loss Care for Lenders page to learn how you can digitize and streamline your total loss processes.