Apr 5, 2022
The auto lending landscape continues to be shaped by the pandemic and the resultant microchip shortage. Vehicle values remain at an all-time high. Fewer available vehicles means more competition plus affordability issues for potential buyers and borrowers.
Getting a new car with an auto loan is more difficult than ever, and financial institutions are missing out on a massively underserved market of reliable borrowers in the near-prime credit tiers. The near-prime borrower is characterized as having limited credit experience or a single major credit problem (usually driven by medical problems or a divorce). They tend to lack savings, are typically not rate sensitive, and instead are monthly payment driven. This tier of borrowers holds a bit more risk but, when priced appropriately, serving the underserved is worth it, particularly for lenders backed by Open Lending.
“Financial institutions often ignore these underserved individuals, but there are many benefits to providing loans to near-prime borrowers,” Open Lending’s Chief Revenue Officer, Matt Roe, explained. “These benefits include booking more loans, increasing profitability, enhancing borrower relationships, and attracting new borrowers,” he continued. Roe will be discussing this and more at the 2022 MeridianLink Forum next month.
Open Lending’s ROA targeting and risk-based pricing methodology allow lenders to price loans on an individual basis, depending upon a wide range of characteristics and multiple risk attributes. These risk attributes include credit score, credit depth, loan origination channel, loan term, loan value, geographic location, whether the vehicle is new or used, and the vehicle’s make and model. It will also base the pricing on the probability of the borrower defaulting, as well as the severity of the default. Incorporating the severity of risk into your loan default calculations is a critical piece to accurately pricing loans.
Because of the high demand due to supply chain constraints, vehicles are severely overvalued and carry a significant risk of severity of loss in the upcoming years. Accurately pricing based on risk ensures a lender’s ability to navigate an unpredictable economy while providing them a leg up over the competition.
“Lenders can further limit their risk while increasing their auto loan volume with our Lenders Protection™ program,” Roe concluded. “The Lenders Protection™ program improves access to auto loans for near-prime borrowers by lowering the risk to financial institutions.”
By leveraging Lenders Protection™, lenders can drastically diminish their risk while increasing auto loan volumes based just on the applications they already have. Contact us today to learn what Lenders Protection™ can do for our institution!Share
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