Category: Economy

Experian’s latest State of Auto Finance Market Report made headlines recently, painting a rosy picture for the used-vehicle market. Overall, pre-owned vehicles accounted for 55.61 percent of all financing in Q2 of 2016. Consumers across all credit tiers are flocking to pre-owned vehicles, with super-prime and prime consumers accounting for 44.95 percent of all pre-owned loans, representing a 2.6 percent year-over-year increase.

While Experian highlighted the fact that more prime consumers had entered the market, to the discerning eye, the pre-owned vehicle market is still a subprime game. In fact, nonprime, subprime and deep subprime consumers accounted for 55.05 percent of all used loans in Q2 of 2016. And, just as consumers don’t quite know the true quality of the vehicle, or vehicle health, lenders are in the dark as far as vehicle reliability.

This unknown could lead to more vehicle repairs, a higher likelihood of breakdown, and even an increased risk of total loss. Add that to the fact that more than half of the pre-owned market is made up of risky credit tiers, and it’s pretty clear why auto lenders as a whole look to protect themselves with higher APRs for the pre-owned space.

Even Experian’s latest report reflects this trend with an average new APR of 4.82 percent and an average pre-owned APR of 8.97 percent.  However, with more prime and super-prime consumers entering the space, lenders will be hard-pressed to reduce their rates to be more in line with what those consumers are accustomed to in the new-vehicle space. So, how can lenders address this pressure to reduce their average APR for pre-owned vehicles while also protecting their loan portfolios as a whole?