Agora Data’s Matt Burke Explains How to Thrive During an Economic Storm

Remember 2020? Inflation was low, lockdowns were the norm, and the U.S. government handed out stimulus money like candy. The COVID-19 pandemic was a true black swan event that changed the rules of the auto industry – temporarily, that is.

You can only put off the inevitable for so long.

Take a look at the charts below to see what I mean. Since 2020, defaults have been artificially suppressed by generous deferment policies, stimulus checks and federal interventions like the student loan payment pause. This data shows a whopping 50 percent decrease in defaults and annualized net losses, compared to the four years pre-COVID.

PeriodAnnualized
Net Losses
30+ Day Delinquencies60+ Day Delinquencies90+ Day DelinquenciesSeverity Rate
May 2016-April 20188.08%13.15%4.52%1.44%56.76%
May 2018-April 20208.42%13.98%4.98%1.62%56.44%
May 2020-April 20224.44%10.67%3.90%1.28%43.76%

Source: Kroll Bond Rating Agency

PeriodAuto Default Index
May 2016-April 20181.00%
May 2018-April 20200.94%
May 2020-April 20220.48%

Source: S&P/Experian

It was fun while it lasted. But losses that low just aren’t sustainable.

Are you prepared for a potential onslaught of defaults as all the customers who were barely getting by are now expected to pay in full and on time – with no safety net?

EASY COLLECTIONS TO POTENTIAL RECESSION

Your servicing team will soon come off their sugar high of collecting in an environment in which free money was everywhere.

That alone would be challenging. But add in a looming recession and sky-high inflation, and it’s time to get serious about your plan.

Preparation is paramount. It will separate those who thrive in the months ahead from those who are just winging it.

Before planning anything, though, take a moment to adjust your mindset.

One thing we learned from COVID is black-and-white norms become a lot grayer when a crisis hits. In an ever-changing environment, flexibility, creativity and superior customer service will be crucial to succeed.

That means you must fix your eyes on your primary goal – working with customers to keep them in the car. Think outside the box to keep the payments coming in, and you’re winning.

Here are a few more tips you can implement in response to a recession.

Update your deferment policy: A recession is an economic pandemic to non-prime borrowers, so your customers might need extra time to make payments.

Consider loosening the requirements to receive a deferment, and potentially defer interest accrual during the deferment period.

Just watch your cash flow, as too many deferments can set you up for problems down the road.

Accept partial payments: If you don’t already accept partial payments, adjusting your policies will show customers you are making a real effort to assist them.

You want to keep borrowers engaged, invested and motivated to pay the most they can.

Change your fee policy: During a period of financial difficulty, your customers’ priority should be paying back their loan.

When payments go up because of late fees and customers are genuinely doing their best, it might be more beneficial to waive the fees. Keep some goodwill alive and the payments rolling in.

Help customers with maintenance or repairs: Discounted or free oil changes in exchange for timely payments is one way to create a win-win scenario for your business.

Consider discounting repairs or even repairing the vehicle at no charge if it enables the customer to pay on time.

Leverage data to your advantage: In many ways, your collections success is determined at origination.

Is the right customer in the right car with the right LTV? If so, your collectors’ jobs will be exponentially easier.

But how will you know the answer?

That’s where comprehensive data analytics comes in. Independent and Buy Here-Pay Here dealers now have access to fintech platforms like Agora Data’s AgoraInsights, presenting millions of data points from individual dealerships and similar stores across the country.

Using artificial intelligence, those platforms can accurately predict portfolio performance and give action steps for improving performance in the underwriting stage.

Think about outsourcing: To execute well, loan servicing requires your full attention and substantial resources. It distracts from sales and originating loans – two aspects of the business only you can do.

I understand that can be a sore spot for dealers who don’t want to transfer control of their collections.

But with some third-party servicers specializing in subprime customers and offering specialty expertise and economies of scale, it might be time to reconsider outsourcing.

What could you accomplish if all your manpower was focused on your core business of selling cars?

Learn from your peers: The worse the economy gets, the more important communication is – especially with other independent and Buy Here-Pay Here stores in your area.

Find out what works and what doesn’t, and learn from others’ mistakes instead of making your own.

Look at the customer holistically: You invest a lot of money to get that buyer on your lot, so calculate your customer acquisition cost and do your best to maintain that relationship long term.

The more you can increase the lifetime value of every good customer through referrals and repeat purchases, the more stable your cash flow will become.

Show empathy and get ready to problem-solve: Yes, you have a business to run. But don’t forget you’re dealing with human beings.

A little compassion goes a long way toward keeping the lines of communication open so you can work with customers to creatively solve any payment problems that arise.

Make it your mission to reiterate those themes to all levels of staff and incentivize their performance accordingly. If management is on board, but front-line employees are still living in the past, it won’t do you any good.

Remember, recessions are unavoidable. But they’re also survivable.

Take a breather from your day-to-day stress and start preparing now. It will pay off tenfold in the months to come.

Matt Burke is the Chief Operating Officer of Agora Data.