Whether directly or indirectly, action or nonaction can increase the likelihood of nonpayment by your clients and customers.
We can identify, sometimes in hindsight, what could have been done to prevent loss.
Looking back to events leading up to the recession of 2008, we know and should have known that the secondary loan market was a bad idea. Lending money to people who did not qualify for a loan and pledging any remaining equity in a home was a bad idea.
What are your thoughts on the shift in financing a new vehicle? Is the trend increasing the likelihood of non-payment?
A traditional auto loan is for a two- to five-year period. Because of mounting debt, many consumers can not qualify for or carry the monthly payments of a traditional loan. To make non-qualified purchasers purchase, an extended seven-year loan is gaining popularity. In fact, more loans for seven-year terms are being written than “traditional three- to five-year loans.”
To further induce the purchase, the industry offers customers a way to roll balances on existing loans and combine it with the loan for the new vehicle together with the purchase price of the vehicle.
As a result, the customer that fails to qualify for a traditional loan finances their unpaid existing loan balance together with the purchase price of a new vehicle. The terms of the loan increase the likelihood of nonpayment by the borrower.
It’s easy to see problems in outside situations. Selling on terms makes you a lender.
Are You Increasing Your Odds of Nonpayment
Looking at your own practices, are there situations in which you increase the likelihood of nonpayment?
- Identify and confirm whether someone is qualified to buy?
- Sell to non -qualified buyers?
- Extend terms that your buyer cannot meet?
- Maintain a credit policy?
- Do you enforce your credit policy?
- Do you carve out exceptions for “good customers?
- “Extend” terms to customers to induce a sale?
- Do you ask for a retainer/deposit upfront?
- Do you proceed without the requisite retainer or installment payment?
- Extend more credit than you can afford?
- Take on projects that you can not afford to finance?
Rewards come with risks, and only you can determine your tolerance for risk. But, if your terms are such that your customer base is made up of nonqualified buyers you will almost guarantee the likelihood of nonpayment.
Let us know your thoughts and any insight you might like to share with readers.
For more information about debt collection contact Frank, Frank, Goldstein and Nager for a consultation.