Force-placed insurance is an important issue that can cause a borrower to fall far behind on their loan
payments and ultimately can cause the repossession of a vehicle. Our office has reviewed many cases where
the cost of force-placed insurance has caused a borrower to lose their vehicle, and worse, have their credit
record damaged.
Loan documents require the borrower of a motor vehicle loan to maintain a minimum level of insurance
coverage. Should the borrower fail to obtain or maintain the specified level of coverage, the lender has the
contractual right to obtain coverage on the vehicle to protect the value of the loan collateral. Please note that
this coverage will not cover the borrower's equity in the vehicle nor provide any liability coverage.
Force-placed insurance is very expensive because the insurance carrier providing the coverage has no ability
to underwrite the vehicle being insured. As such, the owner could have a terrible driving history with many
recorded losses but the insurer will be required to issue coverage automatically. Thus, the lender's cost to
obtain this insurance is extremely high.
The cost of the force-placed insurance is passed on to the borrower when that cost is added to the loan
balance. The entire balance may become immediately due or the loan payment may adjust over time, either
over the term of coverage or a twelve month amortization. This is a choice option by the financial
institution. The borrower should take steps to fully understand how their financial institution applies the cost
of the force-placed insurance to avoid the unintended consequence of becoming immediately delinquent on
the loan. Even if the borrower had previously been on time with every single payment for years on this loan,
they now have a big problem. The cost of an entire year of very expensive coverage has been added to the
loan.
The only good solution is for the borrower to prove that they had adequate insurance the entire time and that
the suspected lapse was merely a mistake. This does happen when the lender and the borrower's insurance
company have had a communication problem. The borrower should work with the insurer and the lender to
set the record straight, and then the lender should remove most or all of the cost of the force-placed insurance
from the loan balance.
The next best solution if the borrower's insurance had indeed lapsed is for the borrower to reinstate their
prior policy or obtain a new policy to cover the vehicle as quickly as possible. In almost all cases the
borrower can find adequate insurance that is substantially less expensive than the force-placed insurance.
Once evidence of coverage is provided to the lender, the lender will cancel the force-placed policy and the
premium will be prorated to cover only the time of the actual lapse in coverage. However, the prorated
premium might still be due immediately. Again, the borrower should find out how their lender will address
this issue before obtaining a loan.
In summary, if you are a borrower, keep your vehicle insured to the minimum standards set by the lender. If
you are a parent, spouse, co-signer or any other type of interested party, verify that the vehicle has, and
maintains, adequate insurance coverage at all times. Discovering the costs and pitfalls associated with force-
placed insurance only after they are applied to your loan is to discover them too late.
Thursday, December 11, 2008
Equifax Observations for the subprime auto loan market
With rising household debt, much higher gas prices and minimal growth
in their incomes, borrowers are increasingly strapped to finance autos,
new or used.
Moody's and Standard & Poor's see subprime quality weakening as
lenders reach farther down into the credit population to extend riskier
loans. The ability of subprime auto lenders to grow may already be
restricted by the impact of higher loan amounts, lengthy terms, and
higher interest rates and monthly payments.
An economic slowdown will generally result in growing inventories
of used vehicles. The resulting lower prices, in turn, reduce lenders'
collateral covering existing loans. As dealers attempt to obtain higher
margins on new vehicle sales, there is an added emphasis on selling
more aftermarket products. This results in the lender financing a greater
maximim advance on Line 5 of the installment contract.
Equifax believes the trends point to a difficult year ahead for the
subprime auto loan market. In particular, discussions with our
customers and economic analysts indicate that:
The market will experience increasing delinquency rates,
repossessions and deficiency balances.
Burdened by heavier costs associated with the management
of delinquent accounts, subprime lenders will have increasing
difficulty in hitting their forecasted revenue and growth targets.
Ultimately, the fallout from these adversities will negatively
impact asset-backed securities.
In our view, the subprime auto industry is entering a period of rising
losses and will face increasing headwinds as credit metrics worsen. The
combination of longer term loans and accelerating losses could have a
magnified impact on the industry's profitability in a deteriorating economic environmen
in their incomes, borrowers are increasingly strapped to finance autos,
new or used.
Moody's and Standard & Poor's see subprime quality weakening as
lenders reach farther down into the credit population to extend riskier
loans. The ability of subprime auto lenders to grow may already be
restricted by the impact of higher loan amounts, lengthy terms, and
higher interest rates and monthly payments.
An economic slowdown will generally result in growing inventories
of used vehicles. The resulting lower prices, in turn, reduce lenders'
collateral covering existing loans. As dealers attempt to obtain higher
margins on new vehicle sales, there is an added emphasis on selling
more aftermarket products. This results in the lender financing a greater
maximim advance on Line 5 of the installment contract.
Equifax believes the trends point to a difficult year ahead for the
subprime auto loan market. In particular, discussions with our
customers and economic analysts indicate that:
The market will experience increasing delinquency rates,
repossessions and deficiency balances.
Burdened by heavier costs associated with the management
of delinquent accounts, subprime lenders will have increasing
difficulty in hitting their forecasted revenue and growth targets.
Ultimately, the fallout from these adversities will negatively
impact asset-backed securities.
In our view, the subprime auto industry is entering a period of rising
losses and will face increasing headwinds as credit metrics worsen. The
combination of longer term loans and accelerating losses could have a
magnified impact on the industry's profitability in a deteriorating economic environmen
Are trends in mortgage subprime lending influencing
In December 2006, the Center for Responsible Lending reported that
one in five subprime mortgages initiated in 2005 and 2006 will end
up in foreclosure, a figure that is double the foreclosure rate of five
years earlier.1 7
All segments of the mortgage industry have seen increasing defaults due
to adjustable-rate mortgage resets and declining home prices. Subprime
lenders in the auto finance industry are wondering what, if any, impact
this trend will have on them.
Auto lenders can take comfort in the fact that the differences in the
subprime mortgage and subprime auto loan markets are greater than
their similarities:
Subprime auto loans typically don't have adjustable rates
that soar at the end of a teaser term.
The average subprime auto loan has a much shorter term
and loan amount than the average subprime mortgage.
Auto lenders, remembering the consequences of loosened
standards in the early '90s, have been more diligent than
mortgage lenders.
While used car sales are off recently, high demand for used
cars is supporting subprime lending.
Some choose to keep the car, not the house. Recently, there has been
some surprising evidence that many holders of Adjustable Rate
Mortgages (or ARMs) are making payments on their auto loans while
defaulting on their mortgages. The reasoning is that some borrowers may
feel hopelessly trapped in reset ARMs, so they quit paying to free up
funds for their other obligations. In the subprime auto market, the
potential effect of this emerging trend is limited because about two-thirds
of subprime borrowers are renters.18
one in five subprime mortgages initiated in 2005 and 2006 will end
up in foreclosure, a figure that is double the foreclosure rate of five
years earlier.1 7
All segments of the mortgage industry have seen increasing defaults due
to adjustable-rate mortgage resets and declining home prices. Subprime
lenders in the auto finance industry are wondering what, if any, impact
this trend will have on them.
Auto lenders can take comfort in the fact that the differences in the
subprime mortgage and subprime auto loan markets are greater than
their similarities:
Subprime auto loans typically don't have adjustable rates
that soar at the end of a teaser term.
The average subprime auto loan has a much shorter term
and loan amount than the average subprime mortgage.
Auto lenders, remembering the consequences of loosened
standards in the early '90s, have been more diligent than
mortgage lenders.
While used car sales are off recently, high demand for used
cars is supporting subprime lending.
Some choose to keep the car, not the house. Recently, there has been
some surprising evidence that many holders of Adjustable Rate
Mortgages (or ARMs) are making payments on their auto loans while
defaulting on their mortgages. The reasoning is that some borrowers may
feel hopelessly trapped in reset ARMs, so they quit paying to free up
funds for their other obligations. In the subprime auto market, the
potential effect of this emerging trend is limited because about two-thirds
of subprime borrowers are renters.18
new Automotive Lending Trends in the united states
Longer loan terms and lower down payments. The percentage of
long-term subprime loans (greater than 60 months) soared from 45.86%
for 2004 transactions to 68.25% for 2006 transactions¡ªand then to about
80% in 2007.3, 4 Down payments on all vehicle financing declined from
19.3% of the sales price in 2004 to 16.3% in 2006.5
The financed amount compared to total vehicle value continues to rise
to historic levels. The loan-to-value ratio of total used vehicle financings
to total value of used vehicles financed has increased over the last two
years (2005 and 2006) and experts say it will continue to rise through
2010.6 In May of 2007, the loan-to-value ratio for auto loans rose to 94%
from 92% two months earlier.7 More than a quarter of those who trade
in a vehicle to purchase a new vehicle are "upside down,"with negative
equity averaging $3,930 in 2006, up $660 from the prior year.8 This puts
pressure on lenders to extend even longer loan terms to win business.
"We see continued increases in the amount of 'extended term' lending¡ª
greater than 60 months," said Jeffrey Young, President & Chief Executive,
Mitsubishi Motors Credit of America Inc. "Banks and particularly credit
unions continue to be very aggressive in carving out their unique niche
in the market by offering terms out to 84 or more months. We've even
seen some 96-month business being offered. While extended-term lending
can be helpful in the near-term for solving a customer's negative equity
or payment objective needs, over the longer term, it only exacerbates the issue
3. Lower prices. Used car prices dropped 2.2% year-over-year during
2006.1 3 The decline was attributed to increased inventories and higher
borrowing rates. Lower used car pricing may also have a negative
impact on selling repossessed vehicles, resulting in higher losses.
4. Less help from home equity. A declining housing market has also
led to weaker demand for cars, as consumers have less home equity to
draw upon. Summarizing data from Case-Shiller Home Price Indices,
two analysts noted, "Home prices have fallen at a 5% annual rate during
the past six months, now deflating in 3/4 of the country's individual
markets. In the past year, home prices decreased 2.7%, the steepest
decline in 16 years, and further declines seem certain."1 4
5. Increased charge-off rates. During the third quarter of 2006, for the
first time in about two years, there was a year-over-year increase in
charge-offs for most subprime auto finance companies. The trend
continued in the fourth quarter.
Investors and lenders in the subprime space are meticulously watching
unemployment rates for clues as to what's coming in net charge-off rates.
Subprime credit trends are closely tied to the unemployment rate, andtrends in the job market can act as a leading indicator of charge-off rates
long-term subprime loans (greater than 60 months) soared from 45.86%
for 2004 transactions to 68.25% for 2006 transactions¡ªand then to about
80% in 2007.3, 4 Down payments on all vehicle financing declined from
19.3% of the sales price in 2004 to 16.3% in 2006.5
The financed amount compared to total vehicle value continues to rise
to historic levels. The loan-to-value ratio of total used vehicle financings
to total value of used vehicles financed has increased over the last two
years (2005 and 2006) and experts say it will continue to rise through
2010.6 In May of 2007, the loan-to-value ratio for auto loans rose to 94%
from 92% two months earlier.7 More than a quarter of those who trade
in a vehicle to purchase a new vehicle are "upside down,"with negative
equity averaging $3,930 in 2006, up $660 from the prior year.8 This puts
pressure on lenders to extend even longer loan terms to win business.
"We see continued increases in the amount of 'extended term' lending¡ª
greater than 60 months," said Jeffrey Young, President & Chief Executive,
Mitsubishi Motors Credit of America Inc. "Banks and particularly credit
unions continue to be very aggressive in carving out their unique niche
in the market by offering terms out to 84 or more months. We've even
seen some 96-month business being offered. While extended-term lending
can be helpful in the near-term for solving a customer's negative equity
or payment objective needs, over the longer term, it only exacerbates the issue
3. Lower prices. Used car prices dropped 2.2% year-over-year during
2006.1 3 The decline was attributed to increased inventories and higher
borrowing rates. Lower used car pricing may also have a negative
impact on selling repossessed vehicles, resulting in higher losses.
4. Less help from home equity. A declining housing market has also
led to weaker demand for cars, as consumers have less home equity to
draw upon. Summarizing data from Case-Shiller Home Price Indices,
two analysts noted, "Home prices have fallen at a 5% annual rate during
the past six months, now deflating in 3/4 of the country's individual
markets. In the past year, home prices decreased 2.7%, the steepest
decline in 16 years, and further declines seem certain."1 4
5. Increased charge-off rates. During the third quarter of 2006, for the
first time in about two years, there was a year-over-year increase in
charge-offs for most subprime auto finance companies. The trend
continued in the fourth quarter.
Investors and lenders in the subprime space are meticulously watching
unemployment rates for clues as to what's coming in net charge-off rates.
Subprime credit trends are closely tied to the unemployment rate, andtrends in the job market can act as a leading indicator of charge-off rates
Thursday, October 30, 2008
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if you're looking for an auto loan,try up2drive to get a quote,its fast and easy
Potential car buyers can apply and be approved for a loan easily using up2drive.com's new unique loan service,when you enter the amount,choose credit rating and resident state, you can calculate an estimated quote in seconds.
up2drive can help you sell your used car by Payment Estimator,enter the year, make and model of a car,you can estimate an appropriate sale price
if you're looking for an auto loan,try up2drive to get a quote,its fast and easy
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Love the smell of a new car? Let up2drive help you finance one! With the drive check™ you can be in control of your car purchase options. Be sure to select "New Car" as the loan type when completing the secure online application. If approved, use the drive check at a franchise dealership. Negotiate the sale price of your vehicle as if you had cash on hand.
What is considered a "New" Vehicle?
The vehicle you wish to purchase should not be previously titled.
Mileage cannot exceed 6,000 miles.
No commercial vehicles and/or vehicles for business use.
For a complete list of vehicle eligibility conditions, click here.Apply today to purchase a new car from a franchise dealership!
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