by Scott Brackin
In the presence of fierce competition and razor thin margins, it’s more important than ever for dealers to look for lenders who are engaged in innovative ways to protect risk, while providing the best in class service levels for the dealership and the consumer.
Dealers understand non-prime consumers are on extremely tight budgets. Would-be customers walking into the showroom already know exactly what monthly payment they can afford. To accommodate these potential buyers, dealers rely on lenders to help provide the right interest rate and term. Historically, lenders have relied primarily on the Big 3 bureaus, however those bureaus have limited information on non-prime consumers. Most dealers know that millions cannot be scored. Per the CFPB, 45 million U.S. adults are living without credit scores due to no credit history, limited data or out of date credit data with the Big 3 bureaus. There are also nearly 90 million adults with scores below 650 and that number is just going up.
Top lenders are innovating and learning alternative data is shedding more light on these thin-file, ghost consumers to help them better assess the risk and offer more flexibility in pricing. To be competitive, dealers must work with those lenders that employ all available information —specifically alternative data—to provide a more complete picture. By utilizing lenders that have access to alternative data on those consumers, dealers will sell more cars, minimize buybacks and help to build better customer relationships.
What is alternative data?
Just as the label implies, alternative data falls outside the scope of the Big 3 credit bureaus and includes public and private records procured from governmental and institutional sources and is accessible via third-party aggregators. Alternative data sources could include records from public files, utility and telecommunications companies and others.
From public records, one may access an immense amount of data regarding a consumer’s property ownership, bankruptcies, liens or judgments and relationships. Public records provide asset and adverse action information that may be modeled. Another source of alternative data is tradeline information that offer access to application inquiries, loan performance and consumer stability details. Alternative tradelines provide past loan payment behavior and an understanding of outstanding debt. At the end of the day, what you are looking for is a lender that has a complete the picture of someone’s ability to afford the automobile.
Move more metal
Lenders that leverage alternative data have deeper information on consumers’ buying behavior. These lenders will provide a pricing advantage over those who are not accessing alternative data.
For example, a lender who uses short-term tradeline data will have information on whether or not the consumer has taken out or paid off any short-term loans. Paying off short-term loans correlates with reduced risk. Specifically, borrowers with three or more paid off short-term loans in the prior year have a 33% lower than average auto loan bad rate – an improvement three times as large!
This information of a lower default rate translates directly into pricing power and the ability for dealers to close more sales.
Better buying experience
Lenders using alternative data have information enabling them to quickly verify information online, reducing some of the manual verification process. Such services include identity verification and information on the consumers’ stability that correlates directly with risk. Often lenders will access alternative data to verify income, employment and ACH events. When successfully implemented, these services make the funding process more cost-effective for the dealer. As a result, the experience is also faster and more efficient for the buyer.
Alternative data providers have built a business around collecting unique quality data from a variety of less traditional sources. The buzz is this data is quickly becoming more mainstream with auto lenders. When choosing a lender, find out if they are using alternative data, what types of data and how they are using the data to help them more accurately assess risk and price the loan.
Lenders leverage alternative data to take a “closer look” at prospects and build a win-win for the dealer and the consumer. Not only will it allow dealers to be more competitive, resulting in more sales, but it will also allow the consumer to be able to afford the vehicle their credit really deserves. By meeting their needs quickly the first time, this will undoubtedly bring about repeat business. A true win-win-win for the dealer, the consumer and the lender.
Scott Brackin is the automotive practice segment leader for FactorTrust. Scott has more than 24 years of experience in financial services, credit risk data, and technology. Since joining FactorTrust in 2013, he’s overseen the company’s rapid growth in the automotive segment as part of his vision to become the premier alternative credit reporting agency (CRA) and analytics business for the automotive finance industry.