By Ray Birch
DEXTER, Mich.—A growing “hidden risk” within auto lending could be creeping up in the rear view mirrors on many lenders, asserts one analyst.
Jim Fish, chief marketing officer with OPUS IVS, told CUToday.info the rising cost of auto repairs—and not just for collision—may be challenging the monthly balance sheets of borrowers and adding to what is already a rising rate of auto lending delinquencies.
OPUS IVS provides automobile repair shops across the country with equipment to diagnose vehicle issues and to repair vehicles.
Fish said the concern comes at a time when both borrowers and lenders are already being challenged to find ways to get consumers into vehicles, as prices on both new ($47,000 average) and used ($33,000 average) vehicle have soared.
As CUToday.info has reported, as credit unions have increased their share of the auto lending market to almost record levels in recent years, one strategy has been to extend terms out to record lengths.
But the longer the term, the greater the likelihood the vehicle will end up in a repair shop.
“Auto lenders should be aware that today there could be some hidden risk within their portfolios, and they need to pay attention to these mounting repair costs as they make loans, Fish said.
As an example, Fish pointed to the large and growing number of computers embedded in vehicles.
Jim Fish
“Some vehicles now have in excess of 100 computers in them. These computers are placed in the bumpers, behind the windshields, in places that can be damaged in the event of a crash,” he said.
ADAS Adds Up
Replacing that technology adds to costs.
Additionally, Fish noted the increasing number of cars that are equipped with advanced driver assistance systems (ADAS)—such as lane departure warning, adaptive cruise control, and automatic emergency braking, which are aimed at helping avoid accidents.
But they represent something of an irony when an accident does occur.
“There’s also typically a bank of sensors that help the vehicle navigate its way down the road and operate in a safe manner,” Fish said. “They're typically radar, and radar is very expensive. Front-ends get damaged and it's something like $1,500 to replace one radar system. Ten years ago almost no vehicles had radar on them. Now, many do as standard equipment.”
Additionally, radar systems require additional time to install, Fish added.
“Much like a headlamp needs to be aimed—if the radar is not aimed properly then it will not deliver the safety benefits,” he explained. “For example, if the radar for automatic braking is not aimed at the road ahead, the automatic braking will never see the vehicle approaching too fast and apply the brakes.”
Not Easy to Calibrate
Advanced driver assistance systems are now on about 70% of new vehicles delivered and on more than 15% of the vehicles on the road today, Fish said.
“And these calibrations are very expensive. They require large amounts of floor space in the shop,” Fish said. “They require specialty equipment. And they require software that talks to the vehicle to calibrate the aiming of these systems.”
Speaking of talking, Fish noted there has been a “growing conversation” about EVs affecting the overall cost of collisions.
“Everybody is talking about EVs driving up collision costs, but it’s ADAS features that are doing it the most,” he said. “It's the presence of those systems, which are very expensive to maintain, to calibrate and to repair and replace.”
More Service Visits
Even with non-collision repairs, Fish said all of those computers and their related, complex wiring only add to the number of things that can require a service visit.
“Such as service lights illuminating,” he said. “For example, on some vehicles when you change the oil you have to connect to the vehicle and reset the oil change monitor. And that's an additional cost. You replace the battery and you need to tell the vehicle via a command from the vehicle that you changed the battery. The vehicle complexity, too, is what's driving up general repair costs.”
That complexity can be seen in the standard repair hours per collision. A decade ago, that figure was between 23 and 25 hours. Today, it’s 28.
“So, labor for a vehicle repair has gone up, as well,” he said, acknowledging that prices for parts, too, have dramatically risen.
Even More Strain
If all of that weren’t enough to strain most household budgets, Fish said that service contract pricing is also rising significantly, as are overall auto insurance policies that in some cases are increasing by double digits.
“All of this means the cost of that vehicle ownership is going up,” he said. “If a lender is calculating what can this customer afford, then the calculation for the final amount should include auto insurance premiums rising markedly as well as a service contract, general repairs if the car is not new, and even gap insurance,” he said, adding. “I think lenders need to recognize that their risk on the consumer is likely to be somewhat higher because of all this.”
More Bad News—Plus Some Good
And, as CUToday.info has reported, the rising cost of collision repairs is leading to a marked increase in insurance companies totaling vehicles, which Fish agreed could lead borrowers to walk away from their loan if the payout from the insurance company falls below the balance on the loan.
It's not all bad news, according to Fish.
“Yes, there are the headwinds, but the tailwind is there is evidence that these high-tech features are reducing the incidence of collisions,” he said.