Unlikely Winner in Near-Prime vs. Subprime Car Loans

Near-prime borrowers of auto loans are showing more creditworthiness than their prime-tier counterparts.

That’s according to an Open Lending analysis that seems to challenge conventional wisdom.

The study indicates that persons with middling credit scores “defied expectations” by not being the main drivers of higher delinquency rates this year.

Instead, lender respondents, who said delinquency rates are occurring in a specific tier, identify prime borrowers as the bigger offenders, outpacing non-prime borrowers by 13 percentage points in delinquencies.

“The trend of prime borrowers driving delinquency rates is similar to what we observed in 2008 (a recessionary year), when more financially stable individuals were suddenly in a position of having to choose which bills to pay,” says Matt Roe (pictured, below left), chief revenue officer of Open Lending. The company provides auto lenders with loan analytics, risk-based pricing and modeling.

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Why is a lower credit-tier group outperforming one higher on the pole?

“The typical near-prime consumer is generally always in a state of recession, continuously fighting to make their monthly payments,” Roe tells Wards.

He adds: “Near-prime consumers tend to weather the storms better during economic downturns. They’re going to find a second job or some way to make that car payment.”

But people within a certain credit-rating group can vary from one to the other. 

For example, from a lender’s perspective, “when you are talking about a non-prime or near-prime consumer – say with an average credit score of 640 – you are hoping you are catching that 640 on the way up as they rebuild their credit, not on the way down,” Roe says.

Near-prime borrowers are important because of their sheer numbers. They make up about one-third of auto loans. 

“Lenders want a balanced portfolio,” Roe says. “With near-prime, the yields are better. Any prime consumer is essentially rate shopping. With the near-prime, if you can price those appropriately to the risk, your return will be a lot better and you’re not going to have to repossess a lot of cars.

“It’s a sweet spot for making yields higher than prime but not overly increasing your risks.”

Open Lending’s “Lending Enablement Benchmark Study,” based on a February survey of 95 top managers at financial institutions’ touches on other topics, such as lenders’ cited priorities this year.

For 44% of respondents, the No.1 priority is faster loan-decisioning without overlooking risk exposure. Speed is important because it increases auto-loan volumes.

“This is something we’ve always known, especially in the near-prime sector,” Roe says. “It’s not always who gets back to the dealer with the best rate, it’s who gets back quickly.

“If an F&I manager shotguns a credit application to 10 lenders, and you are the last to respond, chances are zero of you issuing that auto loan.

Most dealers cite decision speed as the reason they prefer one lender over another. “If you have a platform that can speed up the decisioning time on those lower-tier deals, you’ll have a better capture rate from dealers,” Roe says.

The study also notes automotive lenders’ growing use of alternative credit sources, such as phone and utility bills. Such alternative data sources help lenders identify a great number of qualified near-prime car buyers.

“I don’t think anyone relies solely on FICO credit scores anymore,” Roe says. “With super prime, maybe. But we’re seeing more positive results from the use of alternative credit data and others.

“We’ve known for years that you cannot underwrite an auto loan just based on a credit score. There are too many other variables, such as debt to income.”

To him, a surprise in the study results is that only 34% of polled lenders are using alternative data. “I would have expected that to be higher.”