Fueling Auto Lending Without Increasing Risk

The latest stats are in, and 2017 marked the auto industry’s first sales decline in seven years[1]. Auto experts forecast this trend will continue into 2018.[2] After this run of consecutive year-over-year sales gains, the auto lending market is showing signs of cooling. There are several reasons sales have reached a plateau. People are holding on to their vehicles longer, buying used cars, and choosing lease options while many millennials prefer ride-sharing services over car ownership.

With increased competition among auto lenders, banks loosened standards for auto loans this quarter, following a tightening in auto loan standards over eight straight quarters.[3] An August 2018 industry update by Cox Automotive revealed that, as a result, lenders saw an increase in consumer demand.

As automotive lenders begin to relax their lending standards, how can they protect their balance sheet from risk without excluding creditworthy consumers? A thorough understanding of credit assessment is imperative.

With growing economic and regulatory pressures, reaching qualified borrowers requires issuing attractive credit offers while limiting exposure to risk. Consistent and predictable financing is a critical element of their growth strategies. Having an enhanced view into an applicant’s credit behaviors allows lenders to make credit decisions that better fulfill the needs of dealers and the end consumer.

To have more confidence in their credit assessment of customers, it will be important for auto lenders to take a new view of credit risk by factoring in additional insight and information from alternative data. Lenders can optimize their borrower approval process by:

• More effectively identify the “fallen angels” – i.e., borrowers with past transgressions that are now on the path to becoming good loan candidates
• Looking beyond credit scores and leveraging non-traditional data for more comprehensive borrower assessments
• Adopting solutions that help auto lenders meet regulatory requirements and fair lending compliance

Auto finance is as challenging as ever, and having complete information on borrowers can help lenders stay competitive in this environment – driving profitable growth while managing risk through better insight.

For more information read ID Analytic’s brief, Expanding Financial Inclusion in Automotive Lending.

[1] ABC News, http://abcnews.go.com/Business/auto-trends-watch-2018/story?id=51987894 (accessed February 15, 2018).

[2] NADA, https://www.nada.org/2018-US-sales-forecast/ (accessed February 15, 2018).

[3] Cox Automotive, https://www.coxautoinc.com/learning-center/cox-automotive-industry-update-report-august-2018/ (accessed August 30, 2018).