As dealers and lenders navigate the economic impact of the COVID 19 pandemic, they are having to adjust at a rapid pace to a new way of operating: working with consumers— many who are going through extreme financial pressures, and trying to keep operations going while their employees adapt and adjust to community orders.
A slowdown in the showroom was felt throughout April, and is translating to a very real impact on lenders. According to a Cox Automotive forecast¹, new, light-vehicle sales volume is expected to finish near 620,000 units, down 53 percent compared to last April and down 37 percent compared to last month.
Buying behaviors may change for a growing number of potential car shoppers, many who have lost jobs or been furloughed due to the economic fallout of the pandemic.
Unemployment and other financial strains related to the pandemic means lower-priced used vehicles will likely be in demand when consumers begin to purchase again. At that time, lenders can greatly benefit from advanced, real-time data that includes income and employment verifications to help with lending and business planning decisions for their portfolios.
Strong focus on the new credit spectrum
The effects of the current economic disruption are likely going to result in a number of car shoppers who find themselves in a different credit standing. It will be important for lenders and their dealer partners to better understand their customer’s unique situation to help them with financing for a new vehicle.
Delinquencies are a primary data set in evaluating a person’s ability to pay their auto loan. In Q1, delinquencies were mostly in check but showing signs of a slight increase.
Delinquency data may actually show a decrease in the near term due to deferment programs being made widely available. In fact, OneMain Holdings, which makes personal loans for cars, said recently in The Wall Street Journal² that while 30-to-89-day delinquencies were up 0.32 percentage point in the second half of March compared to last year, in April the increase softened to only 0.15 point. This decline is largely attributed to deferment programs and government stimulus checks.
Leveraging real-time data right now can help provide proactive insights into what portions of a lender portfolio need immediate attention, as well as help get the most current picture of a borrower’s risk levels. Using the right tools to help rapidly adapt to a changing landscape will set lenders apart and help consumers through these difficult times.
Sub-prime auto lending delivers a viable second chance for many consumers who may have made credit mistakes in the past and have since rebuilt their financial and credit risk standing.
Today’s car buying journey
Even before the pandemic, the buyer’s journey was fragmented, time-consuming, and burdensome. Consumers grew frustrated of the lengthy process. In fact, industry research from Cox Automotive³ shows that 90 percent of car buyers expect an extremely efficient purchasing process.
Dealers and lenders will need to balance a faster transaction time with a more transparent online and contactless experience that reduces friction – all while helping the consumer with appropriate financing for the vehicle that meets the consumer’s needs. This will be especially important when lenders and dealers only spend minutes face-to-face or during the application process.
The critical role of real-time verifications
Central to speeding this transaction and experience will be the use of advanced real-time income and employment verifications, which help dealers verify applicant-provided information, potentially avoid contract buybacks, and clear lender stipulations.
Leveraging instant income and employment information from sources such as The Work Number database, provides numerous benefits to lenders and borrowers, including accelerated closed deals. In fact, when applicants’ income and employment are verified by The Work Number, auto applicants are 40 percent more likely to be funded4.
Many auto lenders still rely on traditional credit scores and applicant-reported details to determine creditworthiness or to predict the stability of loans. However, relying solely on credit scores may not give a comprehensive view of credit risk. Not all consumers behave as their credit scores might indicate, especially when economic conditions may cause setbacks that impair credit.
Data sources such as income and employment information, in addition to credit scores, provide timely insights into borrowers’ qualifications. Verifying income and employment information provided by an application can help provide a more complete picture of the borrower, potentially identifying or mitigating risk.
Today’s world of automotive shopping is quickly changing due not only to evolving consumer preferences, but health concerns that are rapidly forcing dealers and lenders to evolve their business models. As more lenders rely on advanced real-time data such as income and employment verifications and other alternative data insights, they may mitigate risk and put themselves in a better competitive position.
1: https://finance.yahoo.com/news/cox-automotive-forecast-april-u-210000530.html
2: https://www.wsj.com/articles/auto-loans-are-running-on-fumes-11588158000
3: https://www.coxautoinc.com/learning-center/2019-car-buyer-journey-study/
4: https://metrix.meritmile.com/Stage/uploads/TWN%20Auto%20Whitepaper_FINAL_MAY%202020.pdf