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The Current State of the Non-Prime Vehicle Finance Industry

For the past 22 years, the National Automotive Finance (NAF) Association has produced a report for the non-prime auto financing market which serves as a key source of benchmarking for those who participate in or support non-prime automotive financing. This year, FICO was pleased to coordinate the survey, market data, and generate the final analysis and report.

The study collected survey data from 40 different non-prime financing sources that represent about $35 billion in portfolio value on topics like financial performance, competitive landscape, and investment priorities.  The data from the survey was then complemented with data from TransUnion and IHS Markit to show transactional loan data on how the larger market is performing. FICO looked at things like the number of non-prime loans completed, average FICO Auto Score, average amount financed, delinquency rate, and other performance metrics.  We also incorporated vehicle value data from Black Book and alternative data from FactorTrust into the report.

The final report showcases the status of the non-prime market in the U.S. (and a bit of Canada).

Top Seven Insights from the Research

  • The number of non-prime loans originated in the last two years has decreased, but the year over year portfolios have increased.
  • Financial metrics within non-prime were a bit soft overall, but yet some participants showed in excess of 30% year over year growth.
  • Competition is increasing - more and more financing sources are focused on customers that are non-prime but have a reasonably good credit history.
  • Fraud is perceived as increasing, especially dealer fraud, first party fraud (Identify theft), and synthetic fraud.
  • FICO scores are up and Payment to Income (PTI) is down slightly.
  • Per-application throughput was down for human underwriters as automated approvals and declines have increased. Humans are now doing more complex application work because many simple applications can be handled without extensive human involvement.
  • Sometimes there is a perceived stigma associated with the non-prime customer, but there really shouldn’t be. The top employment sectors for non-prime customers are teachers, government employees, and healthcare workers.

NAF Annual Meeting

I recently presented this research at the NAF Annual Meeting along with Aaron Dalton, SVP, Prestige Financial, and NAF Board Member.  We received great feedback from attendees, and these findings raised some interesting reactions.  Below are a couple of observations based on questions from attendees and speaking with folks at the conference.

  • The non-prime market is widely regarded as cyclical by industry players, and these cycles do not always directly correlate to the larger economic environment – however they can be strong influenced by it.  Auto financing executives do feel that the turn has been made to the downward part of the cycle.  That said, it didn’t seem like anyone was overly worried – especially the market long timers who have been through downturns before, as the industry has already started to make the necessary adjustments with credit criteria, staffing up in loss management functions, etc.
  • Better predictive analytics (ie, like early stage collections optimization and overall strategy management) can enable financial institutions to make better decisions.
  • The auto financing industry is just scratching the surface on the full impact of Artificial Intelligence in this space.  This is especially true of origination and collections, but also fraud.  It will be interesting to see more machine learning and AI solutions impact the market in the coming years as financing sources deploy more sophisticated solutions that speed up decisions and allow them to compete aggressively for new business in light of new regulations such as CECL (Current Expected Credit Loss).

Companies who use advanced analytics and data to stay customer-focused and take a more segmented approach to decision-making will be best positioned for long-term stability and profit. There is an interesting paradox however, that larger companies tend to have more advanced technology, and yet smaller “boutique” financing firms are currently showing better returns.  Why is this?  One possibility is that the smaller firms stay “closer to the customer” and or have deep familiarity of their local market and exercise close management of their teams. It will be interesting to watch the market evolve with new technology.

It has been an invaluable and insightful experience working through the data.  Thank you to NAF, AFSA, TransUnion/FactorTrust, IHS Markit, and Black Book for contributing to the report this year. If you’re interested in learning more, the full report will soon be available for purchase from NAF:

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