Would-be car buyers with non-and near-prime credit ratings seem among the misunderstood people of the world.
“That’s a great way of putting it,” Kevin Filan, Open Lending’s senior vice president-marketing, tells WardsAuto.
Lenders’ misperceptions of such people as poor credit risks can hurt their ability to obtain reasonably priced auto financing, according to Open Lending's 2024 Vehicle Accessibility Report. Open Lending describes itself as an auto lending enablement firm.
The survey says traditional underwriting practices can alienate and exclude many creditworthy near- and non-prime consumers.
In recent years, many finance institutions have backed off from lending to anyone but prime and super-prime automotive shoppers.
Filan suggests lenders that categorically spurn the near- and non-prime are acting overly cautiously and consequently losing market share in the vibrant and competitive auto-lending sector. It’s more than a $1 trillion industry, according to Experian, a credit rating company.
Moreover, people currently in relatively low credit tiers often aren’t stuck there permanently.
“Many of today’s near- and non-prime consumers are the prime borrowers of the future,” says Matt Roe, Open Lending’s chief revenue officer.
Shunning them “stalls upward mobility and puts the automotive industry at risk,” he says, referring to the potential of fewer auto sales if financing becomes a roadblock.
“To stop these consumers from being pushed out of the market altogether, automotive lenders must offer accurately priced loans that applicants can accept,” Roe says.
Near- and non-prime consumers who feel the sting of lenders fixating on traditional credit scoring can become distrustful, Filan says.
Yet, when it comes to loan delinquencies, prime borrowers outpace non- and near-prime borrowers by 13 percentage points, according to Open Lending.
Using artificial intelligence, predictive analytics and alternative credit sources, such as phone and cable TV payments, allows lenders “to buy deeper” without jumping off a risk cliff, Filan says. “The segment represents a potential $270 billion opportunity to lenders. It’s a matter of how to score that risk.”
It’s also a matter of doing it quickly. Sluggishness doesn’t cut it in today’s digital world. “It’s doing it at the speed of modern retailing, which is three seconds versus days,” Filan says.
For its Vehicle Accessibility Report, Open Lending in October surveyed 1,042 U.S. consumers who are either in the near-prime (620-659) or non-prime (580-619) credit tier.
Here are some of the findings:
Most near- and non-prime consumers are proactive about managing debt.
They maintain a positive outlook on their financial futures.
Sixty-nine percent of them plan to pay off their loans early. “That’s sort of a surprise,” Filan says when asked what in the report caught his eye the most.
Nearly three-quarters expect their financial situation to improve over the next year.
“A lot of people in those credit tiers have thin files, particularly Generation Z,” which affects loan pricing, Filan says.
Some near- and non-prime consumers are buying more used vehicles outright.
Of the 32% of survey respondents who purchased their vehicle outright, 38% did so to avoid debt and 21% sought to forgo costly monthly payments and fees. Nearly half view securing the desired interest rate as the most confusing or unclear part of vehicle financing.
Lender distrust is a factor.
While 63% of near- and non-prime consumers plan to purchase or trade in a vehicle within two years, more than half find it challenging to trust lenders.
More than half of near- and non-prime consumers do not trust financial institutions to offer auto loans with reasonable, honest terms. Some report experiencing bias in the lending process.
Conversely, 60% said they would return to a financial institution that treats them well.
Here come the Zoomers
Entering the car market, near- and non-prime young consumers are hesitant to take on unfavorable loan terms and quicker to do cash deals, according to the survey. (The money often comes from third parties, such as parents.)
Of Gen Z respondents who purchased their vehicles outright, 22% said they did so because they were unsatisfied with the loan rate or repayment terms offered to them.
Sixty-one percent of car-owner respondents aged 18-42 have a loan term limit of 48 months or less, compared to just 42% of those aged 43-68.
Though this age group generally is interested in buying vehicles, many doubt their ability to secure an acceptable loan or find it difficult to trust a lender.
Open Lending sees an opportunity for banks, credit unions and captive finance companies to improve long-term profitability by building trust with this excluded market through personalized financing opportunities.
The company says that to prevent pushing more near- and non-prime consumers out of the market, vehicle availability must improve, and prices and rates must come down.
Buying a vehicle is a complex transaction, Mike Stanton, president of the National Automobile Dealers Assn., tells WardsAuto.
But good dealers can break it down and add value, he adds. When it comes to loan rates, “dealers have relationships (with lenders) where they can get a better rate than consumers can get on their own.”
