As we look ahead to the next half of the year, it is important for auto service providers to understand recent trends among the non-prime consumer segment in order to fine-tune business practices for successful future results.
Background: The industry reaches new heights
From 2010 to 2015, new vehicle sales grew at a compounded annual growth rate of 9 percent, largely due to the pent-up demand following the financial crisis of 2008-2009. During this period, delinquency rates (calculated at 60-plus days past-due) remained well below their peak levels. Looking ahead, analysts expect delinquency rates in auto to stabilize; while they will continue to rise, they will do so at a more moderate pace.
The combination of increasing demand and healthy loan performance allowed lenders to extend credit to non-prime borrowers (those with a credit score below 660 – using the VantageScore 3.0). As a result, new account balances from non-prime borrowers grew from 10 percent of total balances in 2010 to 14 percent in 2015.
Lenders grow cautious
However, starting in 2015-2016, captives, large banks and other auto finance companies began to notice the early signs of deteriorating loan performance, particularly in the non-prime segment, and declining used vehicle values. As a result, many lenders began to tighten their underwriting standards (e.g., limiting terms on new loans) and in the process, pulled back on non-prime originations. Analysts believe that underwriting will continue to tighten at least in the short term with the biggest drivers continuing to be in sub-prime, or credit score of 300-600, (12 percent YOY decline in Q4 2017) and near-prime, or credit scores of 601-660, (8 percent YOY decline in Q4 2017) markets. The decline overall for the same timeframe was 4.8 percent.
Additionally, originations across the entire credit spectrum have declined year-over-year, with the pullback in originations being more pronounced in the non-prime segment, as well.
Delinquencies begin to stabilize
Delinquencies in Q4 2017, declined (ever so slightly) for the first time since Q4 2014. This slight decline is due to two factors:
1) a share shift from non-prime to prime-and-above originations, and
2) the stabilization of non-prime loans
These factors, particularly the improvement in loan performance in the non-prime consumer segments, have given some lenders a reason to consider (re)entering the non-prime segment. Furthermore, the increasing competition for prime-and above borrowers as lenders flock to safety, and the expanding use of alternative data, have given some lenders more motivation for entering the non-prime space.
In particular, alternative data is being used more and more to help lenders score thin-file consumers, enhance risk selection and pricing in down markets. As such, alternative data provides these lenders more confidence to buy deeper and originate loans they otherwise wouldn’t have approved.
Essentially, implementing such data will not only assist lenders in obtaining a more comprehensive profile of net new consumers, but will subsequently provide increased opportunities for consumers to better their credit options now and in the future.
Brian Landau is the SVP and auto business leader, TransUnion. Landau joined TransUnion in 2014. He is responsible for executing TransUnion’s growth strategy for auto and providing thought leadership to the market. Landau has more than 15 years of experience in general management and management consulting, working for and serving many of the largest financial institutions in North America.