By W.B. King
Traditional credit scoring models are excluding many creditworthy near- and-non-prime potential borrowers, Open Lending found in its annual 2024 Vehicle Accessibility Report.
“Open Lending has focused on the near- and non-prime consumer for more than two decades, culminating in deep expertise and experience in this segment’s challenges and opportunities,” noted Matt Roe, the company’s chief lending officer. “Many near- and non-prime consumers are creditworthy but overlooked by lenders, creating a missed opportunity for deserving borrowers and financial institutions. We continuously analyze this segment to ensure we can effectively empower automotive lenders to serve more consumers.”
In October 2023, Open Lending surveyed 1,042 U.S.-based consumers who fall within either the near-prime (620-659) or non-prime (580-619) credit tier. For the past 20 years, the Austin, Texas-based company has provided loan analytics, risk-based pricing, risk modeling and default insurance to auto lenders throughout the United States.
Decreased Affordability
Noted as being proactive about managing debt, the report found that this segment has both purchase intentions in the coming year and maintains a positive outlook on respective financial futures.
“Sixty-nine percent of near- and non-prime car owners plan to pay off their loans early. Nearly three-quarters (74%) expect their financial situation to improve over the next year, and 63% plan to purchase or trade in a vehicle within two years,” the report stated.
Purchasing new vehicles, however, is not topping the list, with “decreased affordability” and “alternative route to ownership” listed as reasons.
“Of the nearly one-third (32%) of respondents who purchased their vehicle outright, 38% did so to avoid debt, and 21% sought to forgo costly monthly payments and fees,” the report offered. “Nearly half (48%) view securing the right interest rate as the most confusing or unclear part of the automotive lending process.”
While the report noted that automotive lenders have historically denied near- and non-prime car loans due to being “high risk,” the polling data proves otherwise.
“Open Lending was among the first to recognize this segment’s untapped value and hidden creditworthiness. Further, a majority of this segment intends to pay off their automotive loan early, challenging the common misconception of risk,” Roe noted.
“These findings support what we’ve seen historically during the Great Recession when many people chose to make their car payments over their rent or mortgage,” he continued. “The tendency to prioritize car payments is mainly due to the link between mobility and earning potential.”
When asked which monthly bills would most likely be deprioritized, those polled said credit cards (34%), phone bills (29%), utilities (15%), rent or mortgage (9%) and automotive loan payment (9%). Owning a car, respondents said, equates to better well-being.
“The tie between vehicle accessibility and improved quality of life is evident and explains why demand for automotive loans remains high for near- and non-prime consumers. But without fair credit opportunities, they’ll buy the best car they can without financing or fall victim to predatory lending practices originating from non-traditional lenders,” Roe noted. “By empowering near- and non-prime consumers to finance reliable vehicles, lenders can help them avoid record-high repairs and ownership costs.”
Opportunity to Serve the Underbanked
In 2023, the majority (79%) of near- and non-prime that bought a new car had an average monthly payment of $600. The used car market, accounting for 25% of those polled, had roughly the same monthly payment.
A cause for concern for banks and credit unions is that this segment is seeking alternative loan sources or trying to forgo loans altogether and pay cash.
“Of the one-third (32%) of respondents who purchased their vehicle outright, 38% did so to avoid debt, and 21% sought to forgo costly monthly payments and fees,” the report noted, adding that 48% found getting the right interest rate the most confusing part of the process, followed by getting the right monthly payment (38%).
“Credit unions and banks have an opportunity to serve their customers and communities, especially underserved communities, by offering accurately priced loans and digestible terms,” the report noted. “Many lenders have pulled back completely from any automotive loan application that scored below prime. If lenders only use traditional credit scores and proof of income, they may deliver an overpriced loan and set up that borrower for failure.”