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TransUnion

TransUnion: Longer Term Auto Loans Increase Odds of Default

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Consumer credit reporting agency sees increased risk of default on some loans.

Easy credit has hurt consumers before and the current credit underwriting climate is no exception. A study conducted by the credit reporting agency TransUnion found the average auto loan term has expanded from 62 months in 2010 to 67 months in 2015.

TransUnion discovered that seven of 10 new auto loans had terms longer than 60 months, up from about half of all loans in 2015 (as of the third quarter of 2015 (July-September)). The agency also found the length of time a consumer keeps a loan and such loans remain in a lender’s portfolio has, in fact, declined.

What accounts for the discrepancy? It’s quite simple — more consumers are refinancing their car loans. This means original lenders are losing customers to refinancers. At the same time, consumers are extending their overall payment terms in an effort to afford their cars — one long-term loan becomes a refinanced long for a super-extended auto loan.

Longer Term Auto Loans

falling moneyThe TransUnion study determined that car loan terms between 73 and 84 months have more than doubled between 2010 and 2015. Indeed, one-quarter of all loans originated in the third quarter of 2015 were for loan terms between 73 and 84 months, compared to just 10 percent five years earlier.

Another factor the TransUnion researchers noted that even as average new auto loan amounts increased during the five-year period, the average monthly payment declined as consumers chose the extended loan terms.

For example, in the third quarter of 2015, the average new auto loan amount was $21,368, compared to $18,008 five years earlier. At the same time, the average new auto loan payment had fallen to $398 per month from $420 per month five years earlier.

Smaller monthly payments should help consumers afford their loans, but TransUnion found that consumers holding longer loans are more likely to fall behind on their payments by at least 60 days (seriously delinquent) than those with shorter terms. And it wasn’t just sub-prime borrowers who were delinquent at a greater rate — the trend affected prime and super prime borrowers as well.

Mitigating Auto Loan Risk

Jason Laky, senior vice president and automotive business leader for TransUnion, noted, “Longer auto loan terms allow consumers to keep payment levels reasonable as they finance more expensive vehicles. However, consumers who cannot afford the monthly payment on a shorter term for the same loan are riskier, and we see this manifested in the higher delinquency rates for 72- and 84-month loans. We encourage lenders to use readily available risk analysis tools to identify borrowers who are more likely to go delinquent with an extended term, to ensure consumers are receiving loans that they can manage.”

For consumers with sufficient cash flow, the risk of a longer term auto loan defaulting diminishes according to TransUnion. Thus, the credit reporting agency urges lenders to carefully explore all applicant debt when underwriting, including mortgages, credit card payments, student loans, and other debt commitment. In effect, an “aggregate excess payment” or (AEP) algorithm is useful for helping lenders determine lending risk and make their decisions accordingly.

As for consumers, affording a new car may mean much longer auto loan payments, going well beyond the original loan term all in an effort to purchase beyond their capabilities.

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Your Insurance Score and Insurance Premiums

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Every consumer has a credit score, a three-digit number that is based on your credit history and behavior. That number can have a profound impact on the way that you live as mortgages, personal loans and even apartments and a new job may depend on your score. The higher your credit score, the more likely creditors, landlords and hiring personnel will view you more favorably.

Insurance Score

Smashed BMW.
Your claim history affects your insurance score.
The insurance industry values your credit score too, but it is only part of a larger or more comprehensive measuring tool. That tool is your insurance score, a number that few people outside of the insurance industry are aware of.

The Insurance Information Institute describes an insurance score as “a numerical ranking based on a person’s credit history.” These scores help insurers assess risk and are also considered “a good predictor of insurance claims.”

An insurance score is based on actuarial studies that indicate whether a person is more likely to file a claim or not. Consumers with a lower insurance score are more likely to file a claim and will, therefore, be charged higher premiums.

Credit Bureaus

As you might guess there is a parallel between credit scores and insurance scores. The former is used to predict credit delinquency, the latter is for predicting insurance losses. Both scoring methods are based on information gleaned from your three credit reports, data that is collected by the three credit reporting bureaus: Experian, Equifax and TransUnion.

One problem here is that some consumers may have very little credit, choosing to pay cash for their purchases. Employing wise money management may cost you financially as a lower credit score can result in higher auto and homeowners premiums, with no consideration given to what your earn. This isn’t fair, of course, but we do live in a world of credit.

Insurance Scores

Just as credit scores serve up a three-digit number, your insurance score does the same thing. That scoring range extends from 200 to 997, with 776 on up representing a good score. Scores of 500 or below put you in the poor score range with both your car insurance and your homeowners insurance premiums most likely coming in double reports the New York Times.

Insurers have another way of calculating risk. Two databases contain claim information: the Comprehensive Loss Underwriting Exchange (CLUE) and the Automated Property Loss Underwriting System (A-PLUS). Anything that insurers want to know about your claim history can be easily found.

Reporting Errors

With your credit reports playing such a significant role in determining two very important scores, the information found in each report should be correct, right? Unfortunately, facts tell us otherwise.

The Federal Trade Commission in a December 2012 report to Congress found that 26 percent of the 1,001 participants in an FTC study reported finding errors in at least one of their credit reports. These consumers reviewed 2,968 credit reports with 19 percent or 572 reports disputed.

Of the reports disputed, 399 had a modification made by the respective credit reporting bureau with 195 consumers reporting a credit score increase following the adjustment. Of the 195, two thirds reported an increase of 10 points or more — what might seem like a small number, but one that could have far reaching consequences for some insurance shopping consumers.

Reports and Scores

By law, consumers are entitled to receive one free copy of each credit report annually. Your free reports are available at AnnualCreditReport.com, a website that was set up by TransUnion, Equifax and Experian. Obtain copies of all three reports and if errors are found, following the reporting bureau’s instructions on how to file a dispute.

You can also obtain your credit score for a fee. A visit to MyFico.com will give you that score.

What about your insurance score? Is that information available to consumers too? Yes it it is. If you visit the Lexis Nexis site, you can obtain separate home insurance and auto insurance scores. Moreover, you can also obtain free CLUE reports that offer a seven-year history of the losses associated with your personal property or automobiles.

See Also — How to Dispute an Auto Insurance Claim Pay Out