Another strategy for growth would be to underwrite auto loans in new segments without formally adopting that segment or deviating from corporate risk guidelines, according to Merchant.
For example, a lender in the upper space might accept consumers in near-prime or lower categories that have been shown to be an acceptable risk by “alternative data,” according to Merchant. The term refers to information that demonstrates creditworthiness but is not present in a traditional credit report, such as utility or rent payments. The merchant said this could be rolled out for borrowers who have little or no credit history, as seen in traditional reports.
“It doesn’t necessarily add risk” for lenders, Merchant said.
Anecdotally, lenders seem to be entering adjacent segments, Merchant said. For example, prime lenders write more risky business, or subprime lenders accept more risky applications.
Origins in the second half of 2022 could show a year-over-year increase due to borrowers in the prime or better credit segments, Merchant said. The model hopes that the increased inventory will allow these higher-credit borrowers to buy more vehicles than they were able to in the second half of 2021, he said.
“Overall, auto builds are expected to remain flat as vehicle supply shortages challenge sales growth,” Merchant said in the statement. “However, consumer demand for the vehicles has not diminished, and as we see inventory increase, this will likely influence origination growth.”