While it’s hard to see exactly what’s ahead for the auto industry, and for lenders in particular, rest assured that the immediate future will be a bit of a curvy ride. There’s talk of a potential auto bubble — but even if that prognosis is overblown, consumer expectations for low rates and favorable terms have been firmly set. And as subprime lenders continue to take on more risk to achieve aggressive growth targets, the pressure intensifies for other lenders to find ways to stay competitive and expand their book within tolerable risk thresholds.
Many of these lenders have discovered alternative data as a vehicle to attract prospects that were previously off the map: Credit profiles that seemed risky on the surface, but are in fact creditworthy. This includes the 53 million “thin-file/no-file” consumers who are unbanked or underbanked. (Think Millennials, immigrant populations and others who have income and a payment history, but haven’t established much of a credit footprint.)
Alternative data offers significant value to your lending practice — enabling you to safely and confidently provide loans to a wider customer base while minimizing risk.
What is alternative data?
Alternative data adds another layer to the traditional credit report. Traditional bureau data offers a lot — but it can’t do everything. To compete with auto lenders in the volatile auto market, you need all the insight you can get your hands on. That’s where alternative data comes in. It offers further context to help you decision more efficiently, responsibly and in compliance with all lending regulations.
Examples of alternative data include employment, utility and telecom accounts, education level, professional licenses and certifications, neighborhood profiles, assets purchased — anything that demonstrates a successful track record of making payments, and a propensity toward financial stability.
When alternative data is applied to bureau data credit scores, it can add lift to lending decisions in all segments, from superprime to deep subprime to even the bureau unscorables. In one study where auto lenders incorporated alternative data into their decisioning, over 40% of the rejected bureau no-file consumers and almost 30% of the rejected bureau thin-file consumers were found to have creditworthy scores when traditional bureau data and alternative data were combined.
But while alternative data is largely applied to the subprime segment, there’s no mistaking its value across the entire auto lending landscape. Increasingly, lenders are turning to alternative data as a tool to better assess the risk of “full-file” applicants and more precisely price for risk. It also helps differentiate between consumers with similar credit profiles, so that marketing activities can target more effectively.
If only we had some kind of sensor, gauge or “industry positioning system” to tell us what the state of auto lending will be a year from now. But one thing is certain — the industry is changing, and consumers’ lives will never fit into neat, predictable boxes. Alternative data will continue to add valuable guidance to lenders trying to navigate the terrain.
 LexisNexis® Risk Solutions and Equifax®, PowerView Score™ Testing