Professionals in Powersports financing are acutely aware that this line of business is historically a bit more challenging than traditional vehicle loans. It’s certainly easier to repossess a car or truck than having to vigorously chase down an elusive motorcycle, ATV, snowmobile, or watercraft. It’s also clear that subprime Powersports financing is a riskier venture that requires tighter credit criteria and more conservative debt-to-income ratios than traditional vehicle lending requirements.
Despite this widespread awareness, according to data compiled by credit reporting bureau Equifax, delinquency rates continue to rise to levels previously experienced in 2007. This increase is especially evident among the least creditworthy borrowers. Their worsening late payment behavior is similar to what we experienced during the last financial crisis. There has been little change in median credit scores which may possibly mean that lenders are allowing underwriting criteria to slide in the face of stiff competition and declining borrower prospects.
There is a wide assortment of levers that Subprime lenders can pull to reduce risk in their portfolios.
Below are four best-demonstrated practices:
- Comprehensive New and Existing Account History
Systematically and rigorously capturing comprehensive account history should be your first consideration. It becomes extremely challenging to analyze; let alone monitor and anticipate potential credit quality issues on the horizon if your lending platform suffers from incomplete account history. A subprime lender’s database should dynamically capture every type of financial and operational behavioral statistic initiated by the borrower. Other key transaction level data should include changes to payment status, bankruptcy dispositions, and real-time commentary.
- Active Credit File Updates
Maintaining a comprehensive and dynamic customer credit file requires a highly interactive credit reporting system supporting both new and existing account strategies. A full-file refresh of account level behavioral data, especially income verification and debt management, will significantly improve your ability to evaluate portfolio risk, improve risk based pricing capabilities, and potentially reduce delinquencies which culminates with lending refinance risks or charge offs. Utilizing Metro 2 credit data standards with the specifications established by the Consumer Data Industry Association for credit reporting will certainly assist in sustaining a consistent and accurate assessment of your prospective and existing customer base.
- Leverage Data Science and Analytics
Data Science and Analytics can enhance your collection efforts by prioritizing outbound calls through queue management, self-cure strategies, and best time to contact strategies. These tools can significantly improve your “early warning problem loan capabilities” by monitoring both internal and external consumer behavior. Another capability includes automated credit limit assignments through alignment of organization-wide risk exposure, deal level, and credit scores.
- Collection Strategies
The reality of Powersports lending is the inevitability of borrower delinquencies and effective debt collecting on bad loans. It’s a tough job requiring superior execution skills; but more importantly, your debt recovery platform will need some powerful capabilities. These should include detailed transaction behavior, refreshed contact information, calling queue and messaging, status of corrective actions, payment plans, and integration with third party vendors.
I hope you enjoyed this post. If you would like to speak with me about the current trends in the Powersports Finance Industry, I am meeting with Subprime lenders across many industries.