Guest Article
When is a good time to repossess that car, boat or RV? Never really, but under the current circumstances we need to take all the variables under careful consideration before we take action. In the first place this should always be a business decision and never based on your personal feelings regardless of your relationship with your customer or member. Often times our feelings and frustration get the best of us and we end up making impulse decisions which end up costing unnecessary losses on the bottom line. Let’s examine this little further.
First thing we should look at is the customers or members tenure and paying habits with the company. Is this a long term customer who has historically performed well, or new customer who is going sideways from the beginning? Often times our customers have numerous products from the organization and we should carefully look at the overall picture. Are there other tools or additional credit available to help this individual? Is this temporary or permanent situation? Does the customer have the ability AND willingness to pay moving forward? If a boat loan goes bad and we have to take a loss, does the profit from all other products keep us on black overall? It’s a much easier decision to make if the customer is new and starts defaulting early with just auto loan and checking account on the books.
Market conditions for repossessed cars have been at all time historical highs and benefitted all institutions after initial loss or in additional recovery after charge off. Used car values keep performing extremely well and if the lending at the time of origination is done responsibly, this will help the organization to minimize losses compared to the past loan loss experience. If the customer is invested in the vehicle and has equity in it, it will be much more likely that they will attempt to reinstate the loan after repossession. On the other hand RV’s and boats are usually the first things to go when people experience loss of income. The remarketing of these luxury items are also much more volatile and the deficiency balances are typically very large dollar amounts impacting the bottom line more severely. You MUST know the trends and market conditions for the collateral and stay informed on seasonal and geographical variations to avoid costly surprises. Subscribe to newsletters and publications that track these areas to stay informed.
As mentioned above, the lending practices are extremely important part of this equation to begin with. Prior to the current recession the lending practices were dictated by large institutions and their ability to securitize portfolios. Other smaller institutions, banks and credit unions had to compete with large over advances, low rates and extended terms to get their share of business. Last few years things changed significantly to those who survived. Regardless of the time or direction the common sense principals are always the same. Does the customer have the ability and willingness to pay? If you require bigger down payment and keep the LTV as low as possible, the customer will become invested to the collateral much faster and will not want to lose it. At worst case they have the ability to sell it on their own if times get tough. If you keep the term of the loan shorter, the principal will start amortizing faster giving you the same impact. Do not get stuck on doing all extended term loans, use odd terms to mitigate potential loss and explain the benefit to the customer. What’s wrong with 31 or 45 month term if the customer can afford it? Lastly, if you can refinance the loan to help the member out of trouble, lower the rate so that the customer sees the benefit of paying more towards principal sooner. You most likely already got significant amount of the original balance paid back and you want your customers to feel that you are really helping them. After all, we are all here to keep the cars, boats and RV’s on the road and on the water. We are not in repo business.
Timo Saarela
Vice President - Servicing
Westlake Financial Services
