By John Flynn, CEO, Open Lending
We recently co-hosted a webcast with our business partner, Ser Technology, about the shift in thinking about auto lending and how credit unions can still compete as sales growth slows and consumer interest evolves. What can we do to influence buying and borrowing decisions moving forward?
Sarah Snell Cooke, consultant to Ser Tech and Open Lending, pointed to some interesting trends regarding consumer spending. “Food spending has increased 10%, between 2015
and 2017. For owned properties and rented properties, spending is up 12%. Health care spending is up 13% and education spending is up 13%. And what I find really particularly intriguing is entertainment spending is up nearly 13%. So, people are prioritizing entertainment up there with education and healthcare, while transportation and car purchase spending are up just 1% during that same period between 2015 and 2017.”
To view a recording of the full webcast, Challenging the Sacred Cows of Auto Lending, please click here!
It’s not just consumer spending that matters though. Our emotional connection and influence with consumers have changed. “I think a lot of credit unions and banks have lost their way. The credit union motto used to be ‘people helping people.’ Now that must expand to ‘people helping people with good credit.’
If you were to look at some of the stats, just for 2018, 69% of the autos purchased used financing, there was $559 million worth of loan originations in 2018. And of that 54% of those borrowers are considered to be near-prime borrowers. What's happening to those consumers when they go to a credit union or a bank is, they're being told, ‘we can do the loan, but we want 20% down, and we're only going to give you a 36- or 48-month term.’ And these are not the consumers that can afford to do that. We’re missing the boat.
Julie Nielsen, our Vice President of Channel Partnerships at Open Lending, added, “Are we just extending loan terms or coming up with pricing because the competition has made some changes, and we're just throwing our hat in that range to also try to capture market share? Or are we really evaluating a customer's ability to repay? Are we putting them in a loan that they'll really feel successful with, be able to make the payment, be able to pay it down on time, and also manage other rising costs in their household? So I think just extending loan terms to keep up with the competition right now always makes the most sense, but really serving our borrower days by giving them loans that they can manage, and they really help them manage debt, not just get into the most car possible.”
“The credit union motto used to be ‘people helping people.’ Now that must to expanded to ‘people helping people with good credit.’”
So, how does Open Lending handle these shifts in the market and the changes in consumer behavior? Lenders are missing the boat on pricing; they're really trying to use the law of averages. They're assuming that all 660 to 700 FICO loans perform the same way. We now have enough data in 19 years in business and monitoring the performance of these loans to predict not just the likelihood of default, but the severity of the loss at the end of the day. So, a 660 score that you're lending 100% of the vehicle value to is not the same risk as a 660 score that you're lending 125% of the value to, so you've got more money at risk with the same FICO score. When you build out your pricing rate sheets, you should take that into consideration. The other thing we've been able to dig into with all of this data is that credit depth is a strong predictor of performance. How long have they been in the Bureau and how many positive trade lines do they have?
How does it all come together? Work with Open Lending, and we can help you leverage all of our consumer data to not only help you create more competitive loans, but also manage your risk and maximize your penetration.
Our moderator, Melina Palmer, expert in behavioral economics and founder of The Brainy Business, concluded that marketing messaging also has to be on point. The brain processes 90% Fat Free Beef much more positively than 10% Fat, so we must keep that in mind when talking rates and other matters of lending. She added, “Don't get sucked in by ‘I'll start Monday.’ Think about what can you do today? What should you do today? How can you be working now to make sure that your financial institution and all of your customers or members are in the best possible space moving forward, and that the work that you're doing is just messaging to the right people the right thing, at the right time?”