By Ray Birch
LAWRENCEVILLE, Ga.—With the explosion of ride sharing services, lenders now face a new risk in their auto loan portfolio that one expert believes many credit unions are not accounting for.
Ride sharing has grown dramatically over the last five years. Today, approximately 50-million people have taken more than two-billion rides since Uber arrived, reports the ride sharing company.
All those extra miles on everyday borrowers’ vehicles are adding risk to loan portfolios, increasing chances lenders will face repossessing cars that have little value after owners can’t make payments or decide to walk away from hopelessly upside down loans.
This is a serious lending risk that is quickly growing, said Anil Goyal, senior vice president of automotive valuation and analytics at Back Book.
“I don’t believe credit unions are actively addressing this risk today,” said Goyal. “One reason is that this risk is not widely known, not widely talked about. Another reason is there is no process in place today for lenders to allow lenders to customize the rate, loan or lease for this kind of customer.”
Impact Clear
But the impact is clear, according to Black Book data. Goyal said that a typical $30,000 MSRP new car will drop in value to $18,000 in two years.
“That is with normal use,” he said. “The depreciation for a car that is used for ride sharing is much more drastic.”
Black Book data shows that the same $30,000 car that is driven three times normal use will drop in value to $7,500 in two years.
“At five times normal use that value is $3,500. You can see the risk here. When lenders underwrite their loans they expect that payments will eventually eliminate negative equity. But that won’t happen with a borrower who is using the car for ride sharing, as well as for their normal driving,” said Goyal, who added that some subprime lenders that are repossessing cars used for ride sharing are facing meager returns at the wholesale auction lanes.
Goyal said it is not simple for lenders to devise solutions to address this growing risk. A big challenge is when lenders make car loans on vehicles for which they cannot determine its ultimate use, including whether the car is not being purchased for a company and used commercially.
Anil Goyal, Black Book
“Many of these credit union members who now use their car for ride sharing are the same members the credit union has been making car loans to for years,” said Goyal.
He suggested that lenders consider developing questions to ask borrowers when they apply about how they will use the car and how many miles they expect to drive in a year. Goyal also said to carefully look at a borrower’s income stream for ride sharing earnings.
He also suggested lenders consider adding a GPS device to cars they feel may be at risk for ride sharing use.
“That way you can track the activity and if you see that the car is being driven to many different locations around the city each day, you know the car is likely being used for ride sharing,” said Goyal, noting that subprime auto lenders currently use GPS devices to track their collateral.
Underwriting Is Key
But Goyal said the real work to address the risk begins with underwriting, with the FI assessing the ride sharing risk in the auto loan portfolio.
“Through strong data analytics solutions we are trying to help lenders understand and account for this risk,” said Goyal. “We are using data analytics to better understand the impact increased ride sharing might have on a portfolio’s ongoing depreciation levels.”
Goyal also sees the opportunity for credit unions to seek out ride sharing drivers and offer them loan rates—higher than their current rates but below many of the financing programs ride share drivers are being offered through non-FI providers.
“Currently the programs available for ride sharing drivers are not appealing from a rate perspective,” said Goyal. “If credit unions can come up with a better targeted program for these members, and account for the risk, they can give these members a much better deal than they are getting elsewhere.”