New ways of using alternative consumer data and scoring credit risk are expanding the number of people who qualify for auto loans.
Auto loan balances and originations are growing. Experian says total auto loan debt reached $968 billion in the third quarter, up 11 percent from the year-earlier period. And Equifax reported auto loan originations this year through July reached $341.2 billion, up 9 percent from a year earlier.
Certainly, robust U.S. auto sales are driving most of the growth in auto loans. But changes in evaluating credit data also seem to be fueling the gains.
Before the 2000s, most lenders used a FICO model to score risk on most auto loans. California-based Fair Isaac Corp. pioneered software that processed credit bureau data on individual consumers and spit out a single score estimating how likely a person was to repay a loan. A FICO score simplified assessing loan risk. It replaced loan officers hand processing credit records.
Its limitation was the records the major credit bureaus had, which then included medical collections -- whether outstanding or paid -- but not rental payments.
FICO scores worked well on people with conventional credit records -- mortgages, previous car loans and credit and department store cards. But assessing risk on those with thin records was still guesswork.
That changed in 2006 when credit bureaus Equifax, Experian and TransUnion formed a joint venture -- VantageScore -- to turn rent, telecom and utility payment data into credit scores.
By 2010, VantageScore was using 45 million credit files to predict and assess creditworthiness, the company said. FICO followed suit in 2014 but at that time, FICO and VantageScore ignored paid medical collections.
Today, VantageScore and FICO have 13 scorecards, including ones dedicated to consumers with thin credit files.
About 10 million of VantageScore's "new score" customers are rated near prime or prime because the data are more predictive. New-score customers are those who just entered the credit market, use credit infrequently, have no recent activity or have no open trades, VantageScore said.
About 9.5 million Hispanics and African-American consumers that were previously unscorable can now be scored. Of those, 7.5 million have VantageScores of 600 or higher, putting them in the nonprime credit category above subprime and deep subprime.
Lenders also use alternative data to identify consumers' monthly payments that credit bureaus miss. They verify income and job tenure using employment data services.
These so-called no-score consumers are getting more loans, Equifax says. The median write-off rates for no-score originations were 23 percent lower from 2012-14 than they were from 2007-09, Equifax said.
"Traditionally lenders used consumer-provided pay stubs to confirm income," said Lou Loquasto, auto finance leader for Equifax. But income verification and alternative data allow "lenders to see consumers' true income, payment obligations and other attributes such as job tenure to determine if they [can] keep up with payments."
All these changes give more consumers a shot at getting an auto loan because lenders can better price their risk. And that opens new market niches to auto dealers.
