- Inflation is starting to recede.
- Unemployment remains low.
- U.S. GDP is growing at a better-than-expected rate.
Typically, these would be indicators of a strong economy. But for many consumers, the surrounding economic environment does little to dull the sting of high interest rates and tightening lending criteria. Steep borrowing costs, along with inflation-driven high prices, have created an affordability gap, making buying a vehicle increasingly difficult for many.
In the short term, these conditions are preventing consumers, especially those in the near- and non-prime credit segment, from buying a vehicle altogether or forcing them to buy cars that are either unreliable or that they can’t afford. As the average age of vehicles in operation continues to hit new records at 12.5 years, many consumers priced out of the market are also increasingly forced into making costly repairs on their existing vehicles. On a macro level, these barriers are making it harder for near- and non-prime consumers to move up the credit ladder.
The absence of an entire buying cycle from these consumers in automotive could reach far beyond automotive financing, as these same consumers, who would typically move up in credit performance, remain mired in a state of lower income potential, unreliable transportation and are falsely viewed as uncreditworthy. Ultimately, when it’s harder for these consumers to achieve upward credit mobility, it puts the future of the automotive industry at risk.
This year’s report builds on Open Lending’s 2023 Vehicle Accessibility Report, which explored the barriers to vehicle ownership and how owning a vehicle impacts consumers’ opportunities and livelihoods. For 2024, we dig deeper into the near- and non-prime segment, which comprises consumers significantly impacted by vehicle accessibility. Notably, the new research revealed that 69% of near- and non-prime consumers intend to pay off their automotive loans ahead of schedule, signaling an opportunity for lenders to meet this impending demand.
Open Lending has focused on the near- and non-prime consumer for over two decades, culminating in deep expertise and experience in this segment’s challenges and opportunities. 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.
For this survey, our goal was to better understand near- and non-prime consumer sentiment on vehicle ownership and automotive financing.
Methodology: 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.
- Near- and non-prime consumers are being excluded from vehicle ownership due to being unable to afford higher monthly payments, which have remained significantly higher since 2020, and the notably lower approvals from lenders as lending criteria have tightened.
- Seven out of 10 near- and non-prime borrowers plan on paying off their automotive loan early, yet many in this segment doubt their ability to secure an acceptable loan.
Automotive lenders often overlook near- and non-prime consumers, deeming them too risky. However, 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.
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. The tendency to prioritize car payments is mainly due to the link between mobility and earning potential.
Vehicle accessibility influences employment and financial security. In our 2023 Index, 62% of non-car owners felt owning a car would improve their current job performance, and 64% felt having access to a vehicle would increase their earning potential.
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. By empowering near- and non-prime consumers to finance reliable vehicles, lenders can help them avoid record-high repairs and ownership costs.
Lending Enablement Solutions can help lenders ensure creditworthy near- and non-prime consumers can buy reliable vehicles and help them become the prime borrowers of tomorrow. The lending industry must look beyond credit scores, using data and AI to analyze broader data sets to identify near- and non-prime consumers most likely to make on-time payments.
- Near- and non-prime consumers are being excluded from vehicle ownership because they can’t afford high monthly payments.
- Many near- and non-prime consumers doubt their ability to secure an acceptable loan.
- More than half of near- and non-prime consumers would still like to purchase or trade in a vehicle in the next two years.
We’ve seen the number of Open Lending’s near- and non-prime new vehicle automotive registrations decrease from 18% before the pandemic to 14% in Q3 of 2023. During this same time frame, prime registrations continued to rise steadily despite the rate hikes.
To prevent more near- and non-prime consumers from being pushed out of the market, vehicle availability must improve, and prices and rates must come down. While lenders don’t have control over these variables, they can use Lending Enablement Solutions to ensure they analyze all the available data and appropriately price loans. Accurately priced loans are critical to stopping the cycle of delinquencies, defaults, worsened credit, and limited access to financing.
- Some near- and non-prime car owners hope to avoid debt and high monthly payments by forgoing an automotive loan and paying all cash.
- Monthly payments and interest rates for used cars are still higher than consumers expected.
- Most near- and non-prime borrowers are receiving shorter loan terms than expected.
Automotive loan rejection rates reached a record high in 2023. If this trend continues, combined with the average age of cars reaching over 12 years, we will start seeing increased pent-up demand with more people needing to buy a vehicle. And because car ownership unlocks access to critical earning opportunities, lifestyle and overall well-being, it’s a foregone conclusion that people will do whatever they can to obtain one if they need it, despite the costs. Credit unions and banks have an opportunity to serve their customers and communities, especially underserved communities, by offering accurately priced loans and digestible terms.
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. Lending Enablement Solutions can give banks and credit unions a competitive advantage by enabling them to expedite decisioning and offer better rates and terms.
- Nearly half of near- and non-prime consumers do not fully trust financial institutions to offer honest and reasonable automotive loan terms.
- Just half of near- and non-prime consumers have a “great deal of trust” in their primary bank or credit union overall.
- Some near- and non-prime consumers have experienced bias and felt overwhelmed by the automotive lending process.
Financial institutions and lenders can garner more trust, especially from near- and non-prime borrowers, by going out of their way to make the process more transparent and more accessible. By analyzing broader, alternative data to measure creditworthiness, lenders can offer loans to a more diverse pool of borrowers. And when lenders have more data and information about their customers, they can provide an experience that fosters continued loyalty. Lending Enablement Solutions can analyze these large, disparate data sets in seconds, expediting decisioning time and enhancing the lending experience.
- Gen Z near- and non-prime consumers face higher rates and monthly payments than their older counterparts.
- Younger near- and non-prime consumers want new cars, which contradicts their hesitancy to take on debt and high monthly payments.
- Apprehensive about long loan terms and high rates, Gen Z near- and non-prime consumers are opting to pay for a car in full or lease.
Gen Z near- and non-prime car owners face higher rates and monthly payments than the average near- and non-prime consumers. Eighty-two percent of Gen Z near- and non-prime car owners pay 6% interest or more on their automotive loan, compared to 73% of all near- and non-prime car owners who pay 6% interest or more. Meanwhile, 80% of Gen Zers spend over $400 on monthly car payments compared to 39% of near- and non-prime borrowers aged 43-68. Gen Zers’ higher monthly car payments could be attributed to their propensity to purchase a new vehicle versus a used one, with over half of Gen Z near- and non-prime vehicle owners buying a new car.
Gen Z is the cohort lenders want to reach to start laying the foundation for borrower loyalty. But while financial institutions are seeking out younger depositors, they’re overlooking the importance of a car loan. Lenders must be willing to extend automotive loans to this group or risk missing out on a vast opportunity and future prime borrowers. By harnessing the power of AI and predictive analytics, Lending Enablement Solutions can help lenders grow this age group while prioritizing risk mitigation.
Open Lending’s research illustrates the impact of the current economic climate on near- and non-prime consumers and their ability to own a car. And, as our previous research revealed, this segment understands the value of vehicle ownership and its impact on their livelihoods and daily lives. However, consecutive interest rate hikes have further exasperated the affordability issues near- and non-prime consumers have continued to face over the past few years.
The data shows that high interest rates, high monthly payments, tightened lending criteria and a confusing automotive lending process are shaping consumer behaviors and substantiating the apprehensions of an entire generation. Despite plans to pay off their car loans early, near- and non-prime consumers are too often overlooked by automotive lenders, which has resulted in fear of being immediately written off because of a less-than-prime credit score. But in disqualifying near- and non-prime consumers, automotive lenders are passing up creditworthy borrowers who want to own a vehicle, prioritize monthly car payments, and have positive financial outlooks.
By extending automotive loans to more near- and non-prime consumers, lenders are allowing them to build a strong credit history. With a focus on this segment, lenders also have the opportunity to establish relationships with younger consumers who are early in their credit journey, paving the way to meet their lifelong financial needs. Many near- and non-prime consumers have a favorable credit trajectory, meaning that when lenders serve near- and non-prime today, they’re securing prime consumers for tomorrow.
