Leveraging expanded data sets is crucial to gauge credit risk

Of the many automotive trends that dominated headlines in 2020, the decline in subprime lending stirred a lot of conversation; and rightfully so. Subprime lending has declined the last several years, but COVID-19 accelerated the trend, leading to concerns that subprime consumers could be locked out of the automotive market.

According to Experian’s Q1 2021 State of the Automotive Finance Market report, deep subprime consumers comprised just over 2 percent of total automotive originations in the first quarter of 2021 and subprime consumers accounted for roughly 15 percent. Comparatively, deep subprime consumers made up 4 percent of originations in 2020, while subprime consumers totaled 18 percent. Similar trends emerged when breaking down originations by new and used.

While the concern for this trend is valid, it is important to understand the full context. The decline in subprime lending can only be attributed partly to the pandemic. In fact, many lenders adjusted for risk in response to COVID-19. Additionally, with inventory shortages, increased pricing for used vehicles, employment instability and stay-at-home orders, some subprime consumers chose not to purchase a vehicle this past year.

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But we’ve also observed a gradual decline in subprime originations for several years, meaning the pandemic isn’t the only factor driving the decline. In fact, the decline in subprime distributions can also be attributed to the overall credit universe becoming increasingly more prime.

Experian data found that, since the beginning of 2019, the number of prime borrowers grew from 32 percent to 36 percent, while super-prime borrowers increased three percentage points to 26 percent. As more consumers focus on their financial health, we will naturally see those changes reflected across credit segments.

Outside of shifts in the overall credit landscape, we’ve also seen financing options remain available for subprime borrowers.

Reflecting on the Great Recession, which had subprime lending trends similar to those we first observed during the onset of COVID-19, financing dried up for subprime consumers, something that has not occurred with the pandemic . There are still options for subprime borrowers to obtain automotive loans. Experian found that, while finance companies in Q1 2021 saw a year-over-year decrease of overall market share from 12.6 percent to 11.3 percent, those lenders in the “other” category, including buy-here-pay-here—who specialize in subprime financing—edged up to 14.4 percent.

Using data to bring subprime consumers back into the market

Subprime borrowers are steadily making up a smaller share of the automotive market, but these consumers still need options for affordable loans. While a complex challenge, combining current tradeline data with expanded Fair Credit Reporting Act (FCRA) credit data can be a useful tool for increasing credit access to consumers without requiring lenders to take on additional risk. These expanded data sets can include on-time payments for items like cell phones, streaming services and utilities, as well as trended credit data and repayments of small-dollar loans.

While credit data remains the primary means for measuring consumer credit risk, there are more than 40 million credit invisibles and over 100 million consumers who have subprime credit scores or limited credit histories. These consumers are often excluded from participating in the credit economy.

That’s why expanded FCRA credit data is crucial to open up more opportunities for subprime borrowers. By layering credit data with expanded tradeline attributes, lenders can examine all aspects of a consumer’s financial capacity while creating a more detailed view of their stability, ability and willingness to repay. The newest scoring models available empower lenders to seamlessly incorporate credit data and expanded FCRA credit data to approve loans they otherwise couldn’t or wouldn’t.

As lenders continue to recover from the pandemic, it is important to understand the trends in the current market in order to meet the various needs of consumers. This includes staying mindful of which consumers may be struggling to enter the market, including subprime borrowers.

While we can’t predict exactly how subprime lending will look in the future, lenders can use data and advanced analytics to identify consumers who can fulfill financial obligations and help bring those borrowers back into the market, while simultaneously supporting their growth strategies.

Melinda Zabritski is senior director of automotive financial solutions at Experian.