Feb 5, 2018 Non-Prime Lending, Insights, Risk Mitigation
Credit unions face a multitude of challenges in lending, from new competitors to the current rising rate environment. Venturing into nonprime auto lending could be your key to keeping your credit unions’ loan growth on track.
The abundance of data that’s currently accessible can help balance risk and reward! Risk-based pricing allows lenders to price individual loans based on various factors beyond credit score. For example, taking into account the severity of defaults and not just the probability of default can provide credit unions with a sound portfolio earning a healthy return. As Open Lending CEO John Flynn regularly says, “A common misconception is that risk is measured by the level of losses we endure. It is not. Rather, risk is a measure of the certainty we have about the level of losses.”
As you consider risk-based pricing and nonprime lending, credit score is not the only thing to consider. Credit unions should also take into account the history they have with the origination channel, the term of the loan being requested, loan-to-value on the vehicle, the applicant’s credit depth, whether the vehicle is new or used and the make and model to determine depreciation on the asset, as well as geographic location.
Being able to approve more loans by extending your standard lending parameters builds strong ties with dealers, which means potentially more loans for your credit union. More direct loans also mean more opportunities for credit unions to upsell with GAP insurance and others. Your credit union may consider a small rate discount for moving over direct deposit, which is the ultimate relationship builder for financial institutions.
Entering into risk-based and nonprime lending has many rewards beyond the dollars and cents of it. When your credit union helps out someone with less-than-stellar credit and they appreciate it, word of mouth will spread to their family and friends. That type of marketing is infinitely valuable! Assisting those who are struggling in the community also raises up the entire community. We hear it time and again: I can’t get to work because I don’t have a car, and I can’t get a car loan because I can’t get to work. Help them end this vicious circle! One by one, it will help the entire community.
On top of all your other mitigation steps, Open Lending’s Lenders Protection™ has insured more than 300,000 near- and nonprime loans valued at more than $6 billion. These loans provide a consistent ROA for our clients of more than 2.4%.
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