Lenders look to expand subprime reach

Auto industry partners are working to establish lending options that are mutually beneficial to lenders, dealers and subprime consumers amid tightening credit. Addressing the gap Nearly 40% of U. .S. adults fall into the subprime credit tier or have no credit, and approximately 15% of the auto market was comprised of deep subprime and subprime consumers in the fourth quarter of 2023, Jonathan Lum , chief operating officer at subprime auto lender Credit Acceptance Corp. (CAC), said at Auto Finance Summit East 2024 in Nashville, Tenn. This highlights “a huge disparity” between consumers needing vehicles and available lending options, he said. To prevent default, CAC works with consumers struggling to make their payments , Lum said. . The lender does not offer deferrals. “Whether it's job loss, divorce or health issues that affect consumers' ability to pay that loan down the road, we work hard with the consumer to come up with payment arrangements that work for them to keep them in their car,” he said. Some lenders, like financier FinBe USA , are trying to find the balance between offering affordable lending to subprime borrowers while still setting the consumer up for success in the long run. FinBe USA provides lending for subprime consumers with an emphasis on those without a Social Security number. “You try to put some guardrails up — whether it's payment-to-income, debt-to-income or down payment — so they have some commitment in the deal,” Seagrave said. Creating benefits for all The challenge lies in creating opportunities in which lenders, dealers and consumers gain from the transaction in the long run, CAC’s Lum said. CAC’s dealer partners share in the cash flow of contracts, with 80% of collections belonging to the dealer, he said. “The dealers are directly incentivized as the customer repays their loan, and the customer can establish or rebuild their credit,” Lum said. “This incentivizes the dealer to sell a quality vehicle that's going to last at least the length of the term at a price the consumer can afford.” Finance, price options key Dealers are working to provide a range of vehicle options and price points to meet demand, while increasing partnerships with subprime lenders, Shirley Jones , chief financial officer at Glendale, Calif.-based Car Pros Automotive , said during the panel. The dealer group works with subprime financiers to provide a mix of offers so that consumers have “various means of having their loans funded,” she said. Car Pros has maintained a 45- to 60-day turn rate in its inventories, while encouraging dealers to “know their market” and decide which inventory levels will work best for their lot. “During COVID, used-car flooring was a profit center for a lot of the dealerships; we were making a ton of money on flooring interest,” she said. "Now you have to know your market, your clients that are coming into the dealership, and you may have to push back on the OEMs and say ‘Hey, we’re not accepting those vehicles right now.’” Risk and reward Risk management is essential for setting consumers up for success in any lending market, FinBe’s Seagrave said. Risk mitigation at the lender includes covering everything from payment decisioning, financing amounts and car type to issuing a customer interview for feedback upfront, he said. Through these steps, “we can help them graduate from subprime to near prime to prime,” Seagrave said. Meanwhile, Bentonville, Ark.-based Arvest Bank increased its average FICO score by 22 points , from 750 to 772 last year, Reggie Branch , senior director of indirect lending for the bank, said at the summit. . Arvest’s strategy aimed to attract “a better-quality customer,” he said. “We tried to put something in place where we could attract more deals ... and move up the credit spectrum,” Branch said. “We haven't tightened up per se, but we have invested in data analytics to understand how our portfolio is performing so that we can make the right decisions."

Lenders look to expand subprime reach

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