What a Rise in Sub-prime Activity Means for Dealers and Lenders for the Remainder of 2019

Even though several automakers squeezed out an increase in their May sales compared with the previous year, this came on the heels of an opening to 2019 whereby auto sales were slightly down as compared to the previous year. In fact, industry observers still expect U.S. auto sales to be about 16.9 million units in 2019, a 2.5 percent fall from 2018.

Driving this downward trend are several factors, including a continued rise in new vehicle prices and falling incentive offers on new deals for financed and leased vehicles.
This has pointed to heightened looks at used vehicles. Edmunds analysts expect 2019 used vehicle sales to reach 41 million, their highest level since the recession.

All of this activity shouldn’t surprise anyone, especially sub-prime lenders. Data from Equifax indicated a rise in subp-rime activity.

Through January 2019, 21.3 percent of auto loans were issued to consumers with a sub-prime credit score, which accounted for 17.1 percent of origination balances. For year-end 2018 the account share was 20.7 percent and the balance share was 16.4 percent.
Furthermore, the average origination loan amount for all auto loans issued in January 2019 was $23,464, which is a 3.3 percent increase over January 2018. The average sub-prime loan amount was $18,934, which represents a 5.0 percent increase compared to January 2018.

While sub-prime origination activity and balances remain steady and in check, the data is showing an increase entering the year. Prices on new cars and trucks continue to rise, but I believe we’re seeing more evidence through sub-prime numbers that there is continued interest and activity in used vehicles for 2019. We anticipate this will persist in the coming months.

While leasing is typically not a large play for sub-prime offers, even this area has continued to rise gently. The average origination balance for auto leases issued in January 2019 was $17,137. This is a 5.7 percent increase from January 2018. The average sub-prime lease amount was $18,150, a 6.3 percent increase over a year ago.
These numbers point to an opportunity for sub-prime lenders with demand for used vehicles continuing to increase for the remainder of 2019. Dealers and lenders should consider the entire shopping and ownership experience, not just the offer.

Automotive lenders, dealers and technology companies view the industry and customers with updated persectives. Today, companies want to find ways to educate customers more than the past before the customer walks into a dealership. They are realizing that an educated customer with the right information is one that is closer to making a final decision and ready to close the sale.

Consumer education is key since franchise and independent dealers want the power to understand the consumer buying behaviors. Notably, engaging consumers earlier in the process, especially online, and leveraging consumer information and habits to help drive a successful transaction.

The great opportunity is here for dealers and finance companies to engage with buyers before they walk into a showroom by leveraging even more targeted marketing to more closely match customers with vehicles during the research process. Having the understanding on what the consumer is looking for both in vehicle and process, helps ensure the right inventory and experience when the buyer arrives at the dealership. Just as important for sub-prime lenders particularly, this knowledge will help with the right credit offer. In turn, increasing the chances of a successful origination and a well-performing credit throughout the duration of the loan.

Sub-prime lenders recognize the importance that a customer educated earlier in the process enters the showroom under a less adversarial environment with fewer negative perceptions or inaccurate information. It helps ensure consumers get the vehicle they can afford.

With the proper insight, data and analytical tools in use today, dealers and lenders can work with leading technology providers to create the right overall experience that drives higher sales, satisfaction and repeat business over the long journey.

Jenn Reid
Jennifer “Jenn” Reid is vice president – Automotive Marketing & Strategy Lead – U.S. Information Solutions (USIS). With nearly two decades worth of experience in automotive on dealer, lender and information services sides, Reid is responsible for the development of Equifax’s automotive growth strategies, as well as overseeing specific marketing plans and initiatives. This includes understanding competitive automotive industry market dynamics and trends, key customer insights, new product innovations, and pricing and chancel strategies.