The current state of lending and how it impacts automotive originations

Brian Landau
Blog Post11/08/2017

Blue-chip lenders and high performing dealers that consistently outperform the competition understand the state of the market and educate themselves as to what the future may hold. As data enthusiasts, we’re able to help you do just that. A winning strategy requires careful attention to trends that impact your value chain while making adjustments to course correct along the way.

We looked at the state of the automotive lending industry and found some thought-provoking trends. From Q1 2009 to Q4 2016, both prime and non-prime lending markets have expanded with new entrants and growth supporting existing players. [1] We specifically looked at lenders originating greater than 2,000 loans per quarter to show the increased competition in automotive lending.

Use the aboveThe above graphs shows number of lenders, by type, originating 2,000+ loans per quarter by both prime and non-prime risk tiers.

Prime Lending

Prime lending has seen explosive growth, particularly in credit unions providing financial products, including auto loans. Credit unions have increased lending to prime consumers by over 200% since Q4 2010. As a result of this growth and increased competition, lenders have to fight harder to acquire new customers and win deals—leading to adjustments in underwriting requirements. Credit unions in particular may need to be even more careful about properly authenticating consumers and vetting fraudsters; supporting their ability to remain competitive in the market while properly managing risk.

Increased competition and greater access to financial products increases the value of added safeguards to improve due diligence—so be sure you’re prepared with access to data tools that enable you to address the complexities that accompany new client acquisition. Doing so will aid in spotting fraud committed by both consumers and dealers, which can include lying about employment and income, and span to auto loan fraud by dealerships that may be savvy enough to manipulate paperwork to get more loans funded.

Non-Prime Lending

While credit unions have seen some growth in the non-prime space, independent lenders account for the majority of new market entrants since 2009. Lenders are extending more credit to sub-prime consumers causing robust origination growth. As we recently explored, the non-prime segment is highly susceptible to changing macro-economic conditions – more so than the prime segment. Increased access to lending products, longer terms and higher payments has the potential to create greater risk exposure for lenders originating and servicing sub-prime auto loans.

If you’re involved in non-prime auto lending, especially as an independent lender with potential resource constraints, it’s never been more important to leverage data to safeguard your business. Sustaining originations growth can only be accomplished with disciplined sales and collection practices to optimize revenue and minimize losses resulting from delinquencies.

Key Considerations

The automotive industry, like other market-driven industries, comes with cyclicality that requires careful attention by market participants. Delinquencies rise and fall, new versus used vehicle sales increase and decrease and resale values fluctuate. But it’s difficult to understand to what degree these market adjustments will impact your business. Planning ahead is challenging—one thing that isn’t challenging is staying ahead of trends with access to the right data. As the auto lending industry evolves and as innovation continues to disrupt the space, changes to indirect lending channels will provide consumers with greater flexibility.

Stay ahead by staying informed.

Stay informed with  TLOxp for the Automotive Industry

[1] Prime refers to borrower VantageScore 3.0 ranges between 661 and 850 and includes prime, prime plus and super prime risk tiers. Non-prime refers to the 300 to 660 borrower VantageScore 3.0 ranges, the union of near prime and subprime.