It’s no secret that higher interest rates and increased costs are putting a strain on consumers’ wallets with higher prices on consumer goods across the board. The auto industry is not immune. Lingering inventory challenges are leading to record high prices for new and used vehicles, making it difficult for many consumers to purchase reliable transportation. Add to that the unpredictable economic environment makes it more difficult for auto lenders to understand the full financial picture of consumers.
Changing credit standing, employment changes and even the rise of flexible income for millions of gig economy workers has required auto lenders to fill in the gaps to try to obtain a more complete financial picture of potential buyers. Access to alternative data insights helps to fill in those gaps.
Harder to secure a loan today
While new vehicle sales have increased nearly 19 percent year over year according to Cox Automotive, prices still remain high with the average new vehicle listing price above $47,000. While used car prices have seen a bit of a decline from record-level prices, they are still above $27,000 and higher than a year ago. With these high auto loan rates and the increase in interest rates, there is more pressure on sub-prime borrowers and shoppers looking for lower-priced vehicles.
Additionally, the Federal Reserve Bank of New York released its March 2023 Survey of Consumer Expectations in April, and when compared to a year ago, perceptions of credit access “deteriorated in March,” according to the report. Respondents said it’s “harder to obtain credit than one year ago rising and reaching a series high,” and they expect it will be harder to get credit a year from now.
A June study by the New York Federal Reserve found that 14 percent of applicants for auto loans were rejected over the past year — the highest such proportion since the New York Fed began tracking the figure in 2013 — up from 9 percent in February.
Why alternative data is important
Eleven percent of the adult U.S. population are considered to have a “thin or stale” credit file, and 11 percent are considered “credit invisible”, according to a study by the Consumer Financial Protection Bureau. Credit invisible individuals tend to be cash-first consumers who work and may even pay utility bills, but don’t actually use credit. People in this credit category typically find it more difficult to take out a loan. Alternative data can play a critical role for lenders because it helps provide a more robust view of the credit risk for the millions of U.S. consumers who have little-to-no credit history.
This is a lost opportunity for auto lenders relying on legacy scoring methodologies, as they will likely miss out on applicants who historically would not qualify for a loan. While credit reports remain a strong indicator of credit history and past financial reliability, Fair Credit Reporting Act (FCRA) compliant information that is not included in traditional credit report data has the potential to help responsibly expand consumer access to credit opportunities – such as auto purchasing. With greater insight into the payment history of thin or no file consumers, auto lenders have the opportunity to expand their net and offer access to new customers that may have previously been overlooked in traditional models. Leveraging newer forms of alternative data for these consumers can also be done in a real-time frictionless environment.
What is alternative data and how does it work
It’s important for today’s credit ecosystem to evolve. While traditional credit data is still an important component to understanding consumer behavior, continuing to rely solely on this data alone when extending credit opportunities can limit critical access to credit.
With the tools and data resources available today, there are new ways to identify and score more consumers, and at the same time minimize risk. By widening the scope with alternative data, consumers and auto lenders alike can find more opportunities that may have previously been hidden. These additional data sources today cover credit and payment histories for the following:
• Telecommunication and utility data
• Consumer permissioned banking data
• Specialty finance data
• Income and employment data
Auto lenders can assess consumer risk by looking at traditional data and combine it with alternative data to better understand payment behavior and insight into non-traditional payments to help further segment risk and clarify debt-to-income (DTI). Layering in alternative insights, like telecommunications and utility payment history data, with traditional credit information can provide a more complete financial picture of auto loan applicants and assist auto lenders with expanding their view into consumers with little to no credit history and approve more buyers who might previously have been turned down for an auto loan.
Adding another layer with Artificial Intelligence (AI)
Furthermore, companies, like Equifax, are leveraging leading AI technology to apply models designed exclusively for the auto industry and to help predict the likelihood of a consumer becoming 90 days past due (or worse) within 24 months of an auto loan being opened. This unique, proprietary approach enables lenders to score more consumers, responsibly expand lender prospect pools and ultimately improve performance while mitigating risk — all within a framework that is customized specifically to auto lenders.
Leveraging the benefits of expanded consumer insights provided by alternative data and the latest in AI technology can help enable auto lenders to better evaluate new loan applicants, with greater confidence. It can help uncover new prospects among no file, thin file, and unbanked consumers, and even adjust credit levels among current customers, by providing a more complete view of payment histories and behavior. There are also benefits that can be carried over to assist with improving marketing and portfolio management. And, perhaps most important, it can improve the overall consumer experience with more competitive, personalized offers and improved decisioning and service.
