Leaning Into New Data Sources Opens Up Financial Access

As we look toward the end of 2021, we know the automotive industry is still recovering from COVID-19 disruptions and operating more cautiously as a result.

Despite the challenges, the automotive finance market has rebounded admirably, even seeing year-over-year increases in total open automotive loan balances, which reached $1.3 trillion in the second quarter of 2021, a notable increase from 2020, when overall loan balances were at $1.17 trillion.

However, one area continues to lag: subprime originations.

While subprime originations were on a downward trajectory prior to COVID-19, the decreases were only incremental with slight changes seen year-over-year. For example, overall automotive subprime and deep subprime originations decreased from 21.27% in Q2 2019 to 20.94% in Q2 2020.

A year later, the drop in Q2 2021 was more significant – falling to 17.18% of overall originations, which demonstrates how significantly the pandemic impacted this segment of lending.

Similar downward trends were seen in used-vehicle loan originations, which have historically served a larger population of subprime consumers. Subprime and deep subprime originations for used vehicles dropped to 26.14% in the second quarter of 2021, down from 30.85% in the same period of 2020.

While industry pundits may be tempted to point to a single driver of the drop in subprime originations, there are likely many factors at play.

One factor could include the trend of responsible borrowing habits and improvements in average credit scores we’ve seen over the past several years.

Year-over-year, many consumers have reduced their credit card balances, lowered their utilization rates and have fewer missed payments, which has led to an increase in the average credit score with fewer consumers falling into subprime tiers.

Another factor possibly contributing to the downward trend could be that many consumers who remain in the subprime categories were hit hard financially by the pandemic and may not be in-market for a vehicle.

Regardless of what’s sparked the downward trend, it’s important to note subprime consumers who are in-market play a vital role in keeping the automotive industry moving forward – and access to fair and affordable credit is a key component of that.

Increasing Financial Access

Subprime consumers are an often-stigmatized segment of society. This is not right. The reality is, not all subprime borrowers represent the same level of risk.

For example, there are some consumers who are categorized as subprime simply because they don’t have a robust credit history or have what’s considered a thin credit file. These consumers are often denied access to credit, not because they are financially irresponsible, but simply because they lack sufficient lending history.

Currently, these consumers, if approved at all, are typically required to make larger down payments and see higher interest rates than prime consumers, resulting in paying more for the vehicle over the lifetime of a loan.

In fact, the average interest rate on a used-vehicle loan was 17.26% for subprime consumers in Q2 2021, compared with just 5.54% for prime consumers.

So, how can lenders open up more access for subprime consumers and lend to them more affordably without creating additional risk? The answer is data.

Layer in Expanded Tradeline Data

Data is essential to helping lenders increase access to fair and affordable credit on the road to recovery ahead. Data can help lenders accurately identify consumers who are currently excluded from the credit economy but can still meet financial obligations and pay responsibly.

For consumers who traditionally are categorized as subprime, layering in expanded Fair Credit Reporting Act (FCRA)-regulated data can tell a different story and create a more accurate picture of their financial situation. Expanded tradeline data can help demonstrate a consumer’s financial behaviors and showcase the financial responsibility and consistency lenders are looking for. These additional data points can include positive payment history of things such as monthly cable and cellphone bills, utility payments, rental payments and more.

While credit data remains the primary means of gauging a consumer’s financial situation, lenders should also layer in expanded FCRA-regulated data to get a more holistic picture of a consumer’s financial situation. This can improve financial access for consumers, while empowering lenders to lend more responsibly, which is a win-win.

Alpa Lally

As the economy continues to reopen, lenders need to focus on expanding financial access for consumers. Taking a layered approach to data is a simple step that can have a big impact in increasing financial inclusion and keeping the automotive industry on the road to recovery.

Alpa Lally (pictured, above left) is vice president of data business for Consumer Information Services at Experian.