Lending Curve

In 2015, the Consumer Financial Protection Bureau (CFPB) released a study finding that 26 million Americans did not have a credit history, and another 18 million were “unscorable” because their histories were too limited. Since then, policymakers, advocates, and the financial industry have all proposed ways to help people without credit scores, many promoting the use of alternative data.

It’s likely that the CFPB study numbers have increased since the research was commissioned. Historically, many lenders have assumed that consumers with limited or nonexistent credit histories are bad credit risks. However, a LexisNexis study found that nearly two-thirds of these consumers are low-risk and could be considered good and profitable customers for lenders.  If alternative sources of data can help correctly gauge these consumers’ risk, auto lenders may be able to generate credit scores that more accurately reflect default rates and therefore expand credit access to this broader population.

Be mindful of regulations

There are many unanswered questions about the use and accuracy of alternative data in general. Data mining to determine credit, employment, or insurance is covered under the Fair Credit Reporting Act. Before you tap into any data providers, make sure they are in compliance with the law. If alternative data is used in credit decisions, the Equal Credit Opportunity Act also applies, and lenders must ensure that there is no disparate impact on protected groups.

It’s that time of year when many folks are looking forward to high school or college graduation, a new or first time job, or possibly a marriage. Exciting times for sure! These life-changing events are opportunities to establish or improve credit. And, purchasing a vehicle can be one of the intersecting activities during these life changing events. As a lender, you play an integral role, and have an opportunity to build a life-long relationship with new customers.

The first opportunity lenders have to work with new customers is often the teen years. An early savings account can transition into a secured credit card. Once the teen turns 18, they can apply for an unsecured card. But have you considered working with that early driver on a car loan as well? A first car purchase can do wonders for establishing credit. Even if the parents are listed as the primary on the loan, adding a teen can introduce them to the world of credit and begin to establish a credit score. Plus, the parents might appreciate the assist on educating their teen.

College graduation is another life milestone where credit and car loans can intersect. As the young adult embarks on their future, their transportation needs might change. Graduate school or a new job in another city demands a dependable vehicle. In addition to establishing credit with a car loan, this is a great opportunity to educate the young buyer on the value of vehicle service contracts (VSCs) or other protection plans. Be prepared to get down to basics on these options and clearly explain their benefits and value. Your young customer will be very price sensitive – but also concerned about the costs of unexpected repairs. Be sure your team is prepared to provide scenarios that match the young adult’s phase of life.