2027 Could Get Interesting for Collateral Recovery
The warning signs are becoming increasingly difficult to ignore. Auto loan delinquencies are climbing, consumers are carrying more negative equity, and the cost of financing continues to put pressure on household budgets. Individually, these developments aren’t necessarily cause for alarm. Together, however, they paint a picture that should have the attention of everyone in the collateral recovery business. A November 2 report from 24/7 Wall St. highlights one particularly troubling development. According to LoanTape research, 17.68% of subprime auto loan balances in the securitized loan pools examined were at least 30 days delinquent in September. The 60-day delinquency rate reached 7%, compared with 3.43% in September 2019. These figures don’t represent the entire auto lending market, but the trend is difficult to dismiss. Delinquencies increased at 10 of the 12 major subprime issuers examined.
Then there’s the negative equity problem. Cox Automotive reports that 57.8% of auto loans in September involved negative equity, up from 52.4% a year earlier. Edmunds’ third-quarter research found that nearly three out of every ten trade-ins involving an outstanding loan were underwater. Those borrowers owed an average of $7,107 more than their vehicles were worth. Some consumers are simply rolling that debt into their next vehicle purchase. The result? Bigger loans, longer repayment periods and monthly payments that are becoming increasingly difficult to manage. Edmunds found that consumers who rolled negative equity into another vehicle financed an average of $57,235, with an average monthly payment of $952. That’s a substantial financial commitment for anyone, particularly households already struggling with everyday expenses.
For repossessors, the concern goes beyond the possibility of more assignments. Consider a vehicle with an outstanding loan balance of $25,000 and an actual wholesale value of $18,000. The lender may get its collateral back, but that doesn’t mean the financial problem goes away. The resulting sale could leave a $7,000 deficiency before additional expenses are considered. And here’s where I think things could get interesting. If delinquency rates continue climbing while vehicle values soften, lenders could find themselves facing larger losses on individual defaults. More repossessed vehicles entering the wholesale market could also put additional pressure on values. It’s a combination worth watching as we head into 2027.
Of course, rising delinquencies don’t automatically translate into more recovery assignments. Lender policies, extensions, deferments, charge-off practices and recovery timelines all influence when an account actually reaches an agent’s desk. But the underlying financial pressures aren’t going away simply because a borrower manages to make another monthly payment. I’m not suggesting we’re headed for another 2008. The circumstances are different, and the available data doesn’t establish that kind of outcome. However, I do believe the auto finance industry is entering a period that deserves considerably more attention.
For agencies, the question may not simply be how many vehicles will need to be recovered next year. It may be how much those vehicles will actually be worth when they get there. 2027 could be an interesting year for the collateral recovery business. And not necessarily in a good way.
