USED VS. NEW FOR AUTO LENDERS: WHY CUSTOMERS CHOOSE USED

U.S. News and World Report succinctly contrasts the pros and cons of buying new vs. used cars. In today’s auto market, New offers: A wide selection of fuel-efficient vehicles, the latest technology, a warranty, purchase incentives, and attractive financing options. New vehicles are also expensive (new technology doesn’t come free), must be purchased at the dealer, and have higher insurance costs. Depreciation starts the minute you leave the lot.

In contrast, Used offers: More affordable, lower insurance, and more options. Of course, the selection is limited, the vehicle might be sold “as-is,” and depending on the dealer, you might not really know what mechanical problems are hidden beneath the hood.

Despite the potential downsides, used-car sales are booming, as the Wall Street Journal reports. Several factors are influencing this trend, but the price of a new vehicle is the main one. According to Kelley Blue Book, the average new car costs $37,000. The average used car is $20,000.

Rising interest rates, combined with steadily increasing prices, are forcing borrowers with poor credit or limited financial resources to forego new in favor of used vehicle purchases. Fortunately, ever-improving vehicle quality and the increasing number of vehicles ending their leases are supplying the used-car market with nearly-new inventory at attractive prices.

Cox Automotive anticipated this trend in their 2018 Used Car Market Report & Outlook Forecast, reporting that favorable economic conditions throughout 2017 boosted used car sales to 39.3 million, and predicting used-car sales of 39.5 million in 2018. More recently, as reported in Auto News, Cox estimated that used-car sales in 2018 reached 39.6 million.  

In 2019 consumer caution linked to a possible economic slowdown, trade negotiations, and geopolitical uncertainty continues to favor the used-car market.

Used vs. New: Lending Opportunities in the Used Market

With new car sales peaking in 2018 and economic factors motivating subprime borrowers to favor used cars, there’s opportunity for lenders who focus on this demographic. However, just as consumers are proceeding cautiously in the post-great recession economic run-up, lenders also need to exercise caution in lending decisions. Lenders can address these concerns with the improvements in loan origination system (LOS) capabilities. A modern LOS supports better-quality lending decisions and reduce portfolio risk using alternative credit data, fraud detection, and valuation services.  

Alternative Credit Data Gives Better Look Into Financial Strength

Multiple factors contribute to subprime credit scores—poor credit management, unexpected life events, or a history of late payments. For many subprime borrowers, a credit score doesn’t quite paint the full picture. By using credit scores only, lenders may be missing borrowers whose financial strength is improving. As part of the underwriting process, integration with alternative credit data services can help determine the true financial standing of applicants and let you confidently offer deals that would have otherwise been declined.

Fraud Is a Growing Threat

Borrowers with low credit scores may be tempted to misrepresent information on their applications to land a loan or get better terms. Identity theft, false income, employment documentation, and straw buyers are some of the most frequent fraud methods. False applicant information strongly correlates with defaults, and those quickly become delinquencies. Integrated fraud detection services provide automated analysis of applicant attributes to detect misrepresentation—both subtle and overt—and prevent unscrupulous borrowers from becoming a delinquency statistic.

Accurate Vehicle Valuation

Valuation of a used vehicle should not be left to guesswork, as it’s a key factor in deal structuring. History-adjusted valuations provide VIN-specific valuations that let lenders determine an accurate value based on vehicle history. An automated call to vehicle valuation services takes seconds. That bit of time gives lenders increased confidence that they are using the most accurate information to deliver an attractive offer.

These powerful capabilities are based on cloud integration, machine learning, and ever-growing volumes of consumer and industry data. Along with the ability to improve confidence in lending decisions, these integrated, automated services accelerate underwriting. “Better decisions, faster” is a competitive advantage for lenders who use a modern LOS.

Used vs. New: For Lenders, Opportunity Requires a Modern LOS

Current economic trends are favorable for lenders with a subprime and/or used-vehicle focus. Ability to benefit from the current opportunity, however, will be closely tied to the lender’s ability to quickly review loan applications, identify and eliminate potential fraud, and rapidly respond with well-reasoned offers. All of these needs are enabled by cloud, fintech, and automation capabilities available in modern loan origination solutions.