Companies are offering delayed payments on auto loans, credit cards and other consumer debt, betting that consumer finances will recover
Efforts to maintain customer relationships now could stave off a wave of potential defaults, finance professionals say. But companies with weakening consumer debt on their books need to figure out how much payment relief they can afford to provide, allowing that some consumers won’t be able to pay later, potentially driving up losses for lenders.
PREVIEWSUBSCRIBE In doing so, finance chiefs are leaning on a playbook that recalls how they handled the record number of defaults and nonperforming loans arising from the 2008 financial crisis. At the same time, financial institutions are tightening lending requirements for new loans—including approving fewer consumers with low credit scores, asking for more income documentation and lowering spending limits on new credit cards.Household debt rose to $14.3 trillion in the quarter ended March 31, $1.6 trillion higher than the 2008 record, according to the Federal Reserve Bank of New York. While auto loans increased to $1.
Ford Motor Credit Co. LLC, the financing arm of the U.S. car manufacturer, meanwhile, is offering changes to payment schedules as well as a deferral of monthly payments. Forbearance programs, such as those offered by car companies, allow lenders to avoid an increase in delinquencies in the short term, according to Fitch Ratings. “But it will likely delay the inevitable charge-offs,” Fitch analysts said in note last month.
How much risk companies take, and how much help consumers might need, will depend on the length and the severity of the economic downturn caused by the pandemic.
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