Automotive Lending

Consumer credit trends and markets are constantly evolving, particularly when it comes to originations and delinquencies on mortgages, credit cards and auto loans. According to Experian research, over 2.7 million out of 89 million active automotive loans and leases are either 30 or 60 days delinquent. Triggers that signal a greater likelihood of consumers falling delinquent on loans, mortgages and credit card payments, include high-interest rates, a high utilization rate and recent derogatory trades. By tracking and forecasting consumer trends over time, you can more easily predict consumer behavior and better prepare for potential issues within each market. Join Gavin Harding, Experian Senior Business Consultant, and Alan Ikemura, Experian Data Analytics Senior Product Manager, during our live Quarterly Credit Trends webinar on May 30 at 2:00 p.m. ET. Our expert speakers will provide a view of the real estate market and share insights on the latest consumer credit trends. Highlights include: 2019 economic drivers Q1 2019 origination and delinquency trends Mortgage Home equity Bankcard Auto Register now

There’s recently been a significant amount of discussion about the stability of the automotive finance industry. Many fear the increase in the volume of delinquent U.S. automotive loans may be an early stage harbinger of the downfall of the automotive industry. But, the fact is, that’s not entirely true. While we certainly want to keep a close eye on the volume of delinquent loans, it’s important to put these trends into context. We’ve seen a steady increase in the volume of outstanding loan balances for the past several years – though the growth has slowed the past few quarters. And while much of the increase is driven by higher loan amounts, it also means there’s been an overall higher volume of vehicle buyers leaning on automotive lenders to finance vehicles. In fact, findings from our Q4 2018 State of the Automotive Finance Market Report show 85.1 percent of all new vehicle purchases were financed in Q4 2018 – compare that to 81.4 percent in Q4 2010 and 78.2 percent in Q4 2006. Suffice it to say, more financed vehicles will undoubtedly lead to more delinquent loans. But that also means, there is a high volume of car buyers who continue to pay their automotive loans in a timely manner. Through Q4 2018, there were nearly 86 million automotive loans and leases that were in good standing. With a higher volume of automotive loans than in the past, we should pay close attention to the percentage of delinquent loans compared to the overall market and compare that to previous years. And when we examine findings from our report, the percentage of automotive loans and leases that were 30-days past due dropped from 2.36 percent to 2.32 percent compared to a year ago. When we look at loans and leases that were 60-days past due, the percentages are relatively stable (up slightly from 0.76 percent to 0.78 percent compared to a year ago). It’s worth noting, these percentages are well below the high-water mark set during Q4 2009 when 3.30 percent of loans were 30-days delinquent and 0.94 percent of loans were 60-days delinquent. But, while the rate of delinquency is down and/or relatively stable year-over-year, it has trended upward since Q4 2015 – we’ll want to stay close to these trends. That said, much of the increase in the percentage of 60-day delinquent automotive loans is a result of a higher percentage of deep subprime loans from previous years – high-risk originations that become delinquent often occur more than 16 months after the origination. Additionally, the percentage of deep subprime originations has steadily decreased over the past two years, which could lead to a positive impact on the percentage of delinquent automotive loans. Despite rising automotive loan amounts and monthly payments, the data shows consumers appear to be making their payments on-time – an encouraging sign for automotive lenders. That said, lenders will want to continue to keep a close eye on all facets of car buyers’ payment performance moving forward – but it is important to put it into context. A clear understanding of these trends will better position lenders to make the right decisions when analyzing risk and provide consumers with comprehensive automotive financing options. To learn more about the State of the Automotive Finance Market report, or to watch the webinar, click here.    

Experian Boost gives consumers greater control over their credit profiles by allowing them to add non-traditional credit information to their Experian credit file.

Subprime originations hit the lowest overall share of the market seen in 11 years, but does that mean people are being locked out car ownership? Not necessarily, according to the Q3 State of the Automotive Finance Market report.To gain accurate insights from the vast amount of data available, it’s important to look at the entire picture that is created by the data. The decrease in subprime originations is due to many factors, one of which being that credit scores are increasing across the board (average is now 717 for new and 661 for used), which naturally shifts more consumers into the higher credit tiers. Loan origination market share are just one of the trends seen in this quarter’s report. Ultimately, examining the data can help inform lenders and help them make the right lending decisions. Exploring options for affordability While consumers analyze different possibilities to ensure their monthly payments are affordable, leasing is one of the more reasonable options in terms of monthly payments. In fact, the difference between the average new lease payment and new car payment usually averages more $100—and sometimes well over—which is a significant amount for the average American budget. In fact, leases of new vehicles are hovering around 30 percent, which is one of the factors that is aiding in new car sales. In turn, this then helps the used-vehicle market, as the high number of leases create a larger supply of quality use vehicles when they come off-lease and make their way back into the market. On-time payments continue to improve As consumer preferences continue to trend towards more expensive vehicles, such as crossovers, SUVs, and pickups, affordability will continue to be a topic of discussion. But consumers appear to be managing the higher prices, as in addition to the tactics mentioned above, 30- and 60-day delinquency rates declined since Q3 2017, from 2.39 percent to 2.23 percent and 0.76 percent to 0.72 percent, respectively. The automotive finance market is one where the old saying “no news is good news” continues to remain true. While there aren’t significant changes in the numbers quarter over quarter, this signals that the market is at a good place in its cycle. To learn more about the State of the Automotive Finance Market report, or to watch the webinar, click here.

There are four reasons why the auto industry should be enthusiastic about the electric vehicle segment’s future.

Vehicle prices are going up, yet consumers seem unfazed. Despite consumers taking out larger loan amounts, they continue to make their monthly payments on time. But, affordability remains a point of industry interest.  As vehicle prices hit record highs, how long will consumers have an appetite for them? According to Experian’s latest State of Automotive Finance Market report, delinquency rates continued a downward trend, as 30- and 60-day delinquencies were 2.11 and 0.64 percent, respectively, at the end of Q2. Those numbers demonstrate that car owners are making timely payments despite rising vehicle costs, which is an encouraging sign for the market. The average loan amount for a new vehicle is now $30,958, a $724 increase from last year. Additionally, consumers are now making monthly payments of about $525 on a new car loan, an all-time high that has seen a $20 year over year increase. The auto market shows little to no sign of declining costs, but vehicles aren’t the only cost to consider – interest rates have increased by 56 basis points since last year.  When combined with the rising manufacturer costs, long-term affordability is a continued concern within the industry. The data points to consumers offsetting the expense by taking out longer loan terms. In Q2, the most common loan length was 72 months—which equates to six years—for both new and used financing. While this lowers the monthly payment, it leaves them subject to paying higher interest over time, as well as the potential for individuals to be upside down on their loan for a longer period of time. The key takeaway from this data is that costs continue to rise, but consumers appear to be doing a better job of managing their finances. This insight can help OEMs, dealers, and lenders make strategic decisions with a better understanding of consumer borrowing and credit habits, and think about how to make car ownership more inviting, through incentive or loyalty programs. For consumers, continuing to take steps to actively improve your credit score is one of the key ways to ensure that you’re able to negotiate the right deal when it comes to financing. Ultimately, for everyone involved, it comes down to leveraging the power of data to make more informed decisions, which can help make vehicle ownership more accessible and affordable. To learn more about the State of the Automotive Finance Market report, or to watch the webinar, click here.

Trivia question: Millennials don’t purchase new vehicles. True or False?

Millions of Americans placed a credit freeze or restricted access to their credit file in recent months to keep identity thieves at bay. Credit freezes keep any new creditors from seeing a consumer’s credit file, which makes it nearly impossible for hackers to open new accounts fraudulently. But a credit freeze can also be problematic for consumers when they are finally ready to consider new credit products and loans.  We’ve heard from credit unions and other lenders about sharing best practices to help streamline the process for consumers who want to permanently or temporarily lift the freeze to apply for a legitimate line of credit. Following are the three ways to help clients with a frozen Experian report quickly and efficiently allow access. Unfreeze account: This will remove the freeze entirely from the consumer’s credit report so that it may be accessed with the consumer’s permission. To do this, the consumer will need to contact Experian online, by phone or mail and provide his unique personal identification number (PIN) code—provided when the consumer froze his account—to un-freeze the report. Thaw account: An action that will temporarily remove the freeze for a timeframe determined by the consumer. The consumer should contact Experian online, by phone, or mail and provide his unique PIN code to thaw the report. Grant a creditor one-time access: A consumer may provide a different/temporary PIN to a lender to access the report just once. The PIN can be emailed to the consumer, presented on screen if the consumer is online, or provided on the phone or by mail. Typically, a consumer’s request to thaw or un-freeze his credit file online or by phone will thaw or un-freeze the file within minutes. Download Checklist Experian can be reached: Online: www.experian.com/freeze Phone: 888-397-3742 Mail: P.O. Box 9554, Allen, Texas 75013 Remember, if a consumer has a frozen credit file with all three credit reporting agencies, he will need to contact each agency to enable access to his report.

Today’s consumer lending environment is more dynamic and competitive than ever, with renewed focus on personal loans, marketplace lending and the ever-challenging credit card market. One of the significant learnings from the economic crisis is how digging deeper into consumer credit data can help provide insights into trending behavior and not just point-in-time credit evaluation. For example, I’ve found consumer trending behavior to be very powerful when evaluating risks of credit card revolvers versus transactors. However, trended data can come with its own challenges when the data isn’t interpreted uniformly across multiple data sources. To address these challenges, Experian® has developed trended attributes, which can provide significant lift in the development of segmentation strategies and custom models. These Trended 3DTM attributes are used effectively across the life cycle to drive balance transfers, mitigate high-risk exposure and fine-tune strategies for customers near score cutoffs. One of the things I look for when exploring new trended data is the ability to further understand payment velocity. These characteristics go far beyond revolver and transactor flags, and into the details of consumer usage and trajectory. As illustrated in the chart, a consumer isn’t easily classified into one borrowing persona (revolver, transactor, etc.) or another — it’s a spectrum of use trends. Experian’s Trended 3D provides details needed to understand payment rates, slope of balance growth and even trends in delinquency. These trends provide strong lift across all decisioning strategies to improve your business performance. In recent engagements with lenders, new segmentation tools and data for the development of custom models is at the forefront of the conversation. Risk managers are looking for help leveraging new modeling techniques such as machine learning, but often have challenges moving from prior practices. In addition, attribute governance has been a key area of focus that is addressed with Trended 3D, as it was developed using machine learning techniques and is delivered with the necessary documentation for regulatory conformance. This provides an impressive foundation, allowing you to integrate the most advanced analytics into your credit decisioning. Alternative data isn’t the only source for new consumer insights. Looking at the traditional credit report can still provide so much insight; we simply need to take advantage of new techniques in analytics development. Trended attributes provide a high-definition lens that opens a world of opportunity.

When gearing up to buy a car, having a checklist of things to look for is important. Happily, it looks like consumers have added something new to the top of that list: managing their credit better. According to Experian’s latest State of Automotive Finance Market report, the average credit score for purchasing a vehicle has increased four points across the board, reaching 722 for new vehicles and 682 for used vehicles. That four-point increase may seem insignificant, but it reveals that consumers are actively managing their credit. With the recent trepidation over the so-called subprime auto finance bubble, the positive change is great news for people in the market to get a new ride. Per the Q3 report, subprime originations reached the lowest level of market share since 2012 (16.6 percent), while prime and super-prime originations showed the largest increases in market share. So what does all this mean? In addition to better managed credit, the increased market share of prime and super-prime consumers shows that industry professionals are leveraging data and analytics when making lending decisions. So if you’re looking to buy a car soon, how can you use that knowledge to your advantage? About six months before zooming to the dealership, take the time to check your credit report to make sure there are no surprises when a potential lender looks at it. Once you know where you stand, you can take steps to improve your credit (if needed) by paying bills on time, keeping balances low and not applying for any new credit before you’re ready to buy that car. Your credit is in good shape, so now what? When car shopping, don’t just look into vehicle make and model. Consider your financing options as well. Different lenders offer different terms and conditions, so comparing options can make sure that you’re getting the best deal possible. For example, our Q3 report shows that credit unions and captive financers (like Ford Motor Credit or Toyota Financial Services) are earning more customers and taking a greater market share of auto lending, at 21 percent and 29.8 percent, respectively. Banks still hold the largest percentage of auto loans at 32.9 percent, but they don’t dominate auto financing like they once did. Leasing is another financing option. Consumers often choose to lease because of lower monthly payments ($412 for a new lease as opposed to $502 for a new loan). The report shows that leasing continues to be a large part of new auto financing, coming in at 29 percent of all financed new vehicles. Lastly, the report shows that loan terms continue to be extended, with the average length of a loan hitting 69 months for new cars and nearly 64 months for used. Extending loan terms can lower your monthly payment, but you should use it mindfully, so the total cost of the vehicle loan doesn’t exceed your budget. For more information about the current State of the Automotive Finance Market report or to view a recording of the webinar, visit our website.

Alternative Data Shedding New Light on Consumers Why Investors Want Alternative Data Banks and Tech Firms Battle Over Something Akin to Gold: Your Data Alternative data for credit has created national headlines in the past year and a lasting buzz in the financial services world. But what exactly qualifies as alternative data in credit? How can it benefit lenders? Consumers? Ask two people these questions and you may get very different answers. Experian defines alternative data as FCRA-compliant data points that are not typically considered when evaluating a potential customer’s creditworthiness. These data points may include rent payments; utility payments, including gas, electric; telecommunications payments, such as mobile telephones; insurance payments; and any other recurring financial obligations. Taking these alternative data points into account can benefit consumers and lenders in multiple ways. Consider that roughly 45 million Americans have either no credit history, or a credit history that is too scarce or outdated to manufacture a credit score. This group of consumers includes not only minority consumers or those from low income neighborhoods, but also the shared economy workforce and millennials without traditional credit histories. Some estimate 121 million U.S. adults are credit-challenged with thin-to-no credit file and subprime credit scores below 600. “People with little or no credit history, or who lack a credit score, have fewer opportunities to borrow money to build a future, and any credit that is available usually costs more,” said Richard Cordray, while he was director of the Consumer Financial Protection Bureau. Indeed, these consumers are in a catch-22; many lenders will not lend to consumers with credit scores of under 620. In turn, these consumers have trouble building credit, and they are blocked from achieving goals like buying a car, owning a home or starting a business. By combining credit reports with alternative data, a more complete picture of subprime, near-prime and thin-file consumers can develop. And analysis of this data can help lenders evaluate a consumer’s ability to pay. When alternative data like rent payments and an individual’s short term lending history are trended appropriately, it can be an accurate predictor of an individual’s financial behavior, and can be an important step toward promoting greater financial inclusion for more consumers. In addition to using alternative data in underwriting, lenders can leverage the data to help with: Expanding the prospecting universe. Data can be used to enrich batch prospecting decisioning criteria to identify better qualified prospects, suppress high-risk consumers, and offer a more complete borrowing history Account review. Alternative data can help signal a consumer’s financial distress earlier, better manage credit lines and grow relationships with existing consumers. Collections. Identify consumers who are rebuilding credit with specialty finance trades, or who are exhibiting high-risk behaviors in the alternative financial services space. More info on Alternative Credit Data More Info on Alternative Financial Services

Many institutions take a “leap of faith” when it comes to developing prospecting strategies as it pertains to credit marketing. But effective strategies are developed from deep, analytical analysis with clearly identified objectives. They are constantly evolving – no setting and forgetting. So what are the basics to optimizing your prospecting efforts? Establish goals Unfortunately, far too many discussions begin with establishing targeting criteria before program goals are set. But this leads to confusion. Developing targeting criteria is kind of like squeezing a balloon; when you restrict one end, the other tends to expand. Imagine the effect of maximizing response rates when soliciting new loans. If no other criteria are considered, you could end up targeting high-risk individuals who cannot get approved elsewhere. Obviously, we’re not interested in increasing originations at all cost; risk must be understood as well. But this is where things get complicated. Lower-risk consumers tend to be the most coveted, get the best offers, and therefore have lower response rates and margins. Simplicity is best              The US Navy developed the KISS acronym (keep it simple, stupid) in the 1960s on the philosophy that complexity increases the probability of error. This is largely true in targeting methodologies, but don’t mistake limiting complexity for simplicity. Perhaps the most simplistic approach to prescreen credit marketing is using only risk criteria to set an eligible population. Breaking a problem down to this single dimension generally results in low response rates and wasted budget. Propensity models and estimated interest rates are great tools for identifying consumers that are more likely to respond. Adding them as an additional filter to a credit-qualified population can help increase response rates. But what about ability to pay? So far we’ve considered propensity to open and risk (the latter being based on current financial obligations). Imagine a consumer with on-time payment behavior and a solid credit score who takes a loan only to be unable to meet their obligations. You certainly don’t want to extend debt that will cause a consumer to be overextended. Instead of going through costly income verification, income estimation models can assist with identifying the ability to repay the loan you are marketing. Simplicity is great, but not to the point of being one-dimensional. Take off the blindfold Even in the days of smartphones and GPS navigation, most people develop a plan before setting off on a road trip. In the case of credit marketing, this means running an account review or archive analysis. Remember that last prescreen campaign you ran? What could have happened with a more sophisticated targeting strategy? Having archive data appended to a past marketing campaign allows for “what if” retrospective analysis. What could response rates have been with a propensity tool? Could declines due to insufficient income have been reduced with estimated income? Archive data gives 20/20 hindsight to what could have been. Just like consulting a map to determine the shortest distance to a destination or the most scenic route, retrospective analysis on past campaigns allows for proactive planning for future efforts. Practice makes perfect Even with a plan, you probably still want to have the GPS running. Traffic could block your planned route or an unforeseen detour could divert you to a new path. Targeting strategies must continually be refined and monitored for changes in customer behavior. Test and control groups are essential to continued improvement of your targeting strategies. Every campaign should be analyzed against the goals and KPIs established at the start of the process. New hypotheses can be evaluated through test populations or small groups designed to identify new opportunities. Let’s say you typically target consumers in a risk range of 650-720, but an analyst spots an opportunity where consumers with a range of 625-649 with no delinquencies in the past 12 months performs nearly at the rate of the current population. A small test group could be included in the next campaign and studied to see if it should be expanded in future campaigns. Never “place bets” Assumptions are only valid when they are put to the test. Never dive into a strategy without testing your hypothesis. The final step in implementing a targeting strategy should be the easiest. If goals are clearly understood and prioritized, past campaigns are analyzed, and hypotheses are laid out with test and control groups, the targeting criteria should be obvious to everyone. Unfortunately, the conversation usually starts at this phase, which is akin to placing bets at the track. Ever notice that score breaks are discussed in round numbers? Consider the example of the 650-720 range. Why 650 and not 649 or 651? Without a test and learn methodology, targeting criteria ends up based on conventional wisdom – or worse, a guess. As you approach strategic planning season, make sure you run down these steps (in this order) to ensure success next year. Establish program goals and KPIs Balance simplicity with effectiveness Have a plan before you start Begin with an archive Learn and optimize In God we trust, all others bring data

Historical data that illustrates lower credit card use and increases in payments is key to finding consumers whose credit trajectory is improving. But positive changes in consumer behavior—especially if it happens slowly over time—don’t necessarily impact a consumer’s credit score. And many lenders are missing out on capturing new business by failing to take a closer look. It’s easy to categorize consumers by their credit score alone, but you owe it to your bottom line to investigate further: Are the consumer’s overall payments increasing? Is his credit card utilization decreasing? Are the overall card balances remaining consistent or declining? Could the consumer be within your credit score guidelines within a month or two? And most importantly, could a competitor acquire the consumer a month or two after you declined him? Identifying new customers who previously used credit responsibly is relatively easy since they typically have rich credit profiles that may include a mortgage and numerous types of credit accounts. But how do you evaluate consumers who may look identical? Trended data and attributes provide insight into whether a consumer is headed in the right direction:   With more than 613 trended attributes available for real-time decisioning and for batch campaigns, Experian trends key factors that provide the insight needed for lenders to lend deeper without sacrificing credit quality. Looking at trended data and attributes is critical for portfolio growth, and credit line increases based on good credit behavior is a must for lenders for two reasons. First, you’ve already spent the money acquiring the consumer and you should not waste the opportunity to maximize returns. Second, competition is fierce; another lender could reward the consumer for great credit behavior they’ve displayed with your company. Be there first, be consistent, or be left behind. Use Experian’s Payment Stress Attributes and Short-term Utilization Attributes in custom scores or swap-set strategies in order to find quality customers who may be worthy of line increases or other attribute credit terms.  Look to trended data to swap in consumers who may fall within a few points under your credit score guidelines, and reward your existing customers before another lender does. Near-prime consumers of today are the prime consumers of tomorrow.

Subprime vehicle loans When discussing automotive lending, it seems like one term is on everyone’s lips: “subprime auto loan bubble.” But what is the data telling us? Subprime auto lending reached a 10-year record low for Q1. The 30-day delinquency rate dropped 0.5% from Q1 2016 to Q1 2017. Super-prime share of new vehicle loans increased from 27.4% in Q1 2016 to 29.12% in Q1 2017. The truth is, lenders are making rational decisions based on shifts in the market. When delinquencies started going up, the lending industry shifted to more creditworthy customers — average credit scores for both new and used vehicle loans are on the rise. Read more>

With steady sales growth the past several years, the auto industry has had a great run since the trough of the Great Recession in 2009. Based on the latest data published in the State of the Automotive Finance Market report, the auto industry’s robust sales totaled more than 17 million vehicles in 2016, pushing the total open auto loan balances to a record high of $1.072 trillion, up from $987 billion in Q4 2015. Despite the current boom, new vehicle affordability is becoming more challenging. The average monthly payment for a new vehicle loan jumped from $493 in Q4 2015 to $506 in Q4 2016, while the average new vehicle loan reached an all-time high in Q4 2016, at $30,621. In addition, the chasm between new vehicle loan and used vehicle loan average amounts is wider than ever at $11,292. This trend appears to be pushing more credit-worthy customers into the used vehicle market. In Q4 2016, the percentage of used vehicle loans going to prime and super prime customers was up from 45.49 percent in Q4 2015 to 47.76 percent in Q4 2016. In addition, the average credit score for used vehicle loans is up from 649 in Q4 2015 to 654 in Q4 2016. Consumers also appear to be combating the vehicle affordability issue by shifting into leases or longer-term loans to keep their monthly payments low. Leasing was up from 28.87 percent of all new vehicle financing in Q4 2015 to 28.94 percent in Q4 2016. Loan terms of 73 to 84 months now account for 32.1 percent of all new vehicle loans, up from 29 percent in Q4 2015. Keeping payments manageable will help keep people out of delinquencies, which is good for consumers and their lenders. Data shows that 30-day delinquencies were relatively flat, moving from 2.42 percent in Q4 2015 to 2.44 percent in Q4 2016, while 60-day delinquencies are growing, moving from 0.71 percent to 0.78 percent. It seems that as long as new vehicle costs rise, it is likely that more people will move toward leasing, longer term loans and used vehicles. While none of these trends are inherently bad, they could re-shape dealer strategy moving forward. Many analysts predict flat new vehicle sales in 2017, making used vehicle, F&I and service business more important to overall dealership growth this year.