Coming into 2020, the U.S. had record automobile loans of more than $1.3 trillion and growing delinquencies ($66B 90+ days past due, totaling 5% of all loans), according to Marketwatch. The same report showed that 22% of all loans were nonprime, compared to 24% of loans the year before. With delinquencies growing and then the coronavirus pandemic hitting, how can lenders determine who will be able to repay their loans?
These are atypical times. Unemployment is skyrocketing due to coronavirus and many financial institutions are offering borrowers loan forbearance to help them through hard times. All of these factors clearly impact borrowers’ credit scores. Now more than ever, a FICO credit score isn’t enough to make a sound decision.
Open Lending takes alternative data into our calculations for auto loans. Our alternative data looks at critical factors such as:
The length of time an applicant has been in their home is a strong indicator of the likelihood to repay their loan.
Payment-to-income is a great ratio for determining a borrower’s ability to repay better than debt-to-income.
Utility bills, level of education and employment histories all contribute to creditworthiness.
Loan-to-value is another crucial data point, because borrowers with more ‘skin in the game’ are less likely to default on a loan.
Geography is another important piece of information to consider as behaviors and economic trends do change in different areas of the country.
It’s important to take into account the rate of depreciation for the type of vehicle, because Fords don’t hold their value as well as a Toyota, which is a consideration for collections.
As we move forward, it’s important to understand everyone has been affected in a multitude of ways. If credit unions intend to remain relevant to consumers, we must consider the entirety of the borrower in underwriting. The power of this alternative data is that credit union leaders can take care of their members and their credit unions.