Three Myths about Online Subprime Auto Financing

Well, that was fun.  And it’s a shame that the long ride to the top of the car sales mountain is over – or at least slowing down. But according to the National Automobile Dealers Association (NADA), that's exactly what’s happening. They’ve predicted that total sales will drop to 17.1 million units in 2017, as pent-up demand from the recession finally dissipates. Indeed, like the fall, change is in the air when it comes to auto retail, and it’s not just the slack demand. Consumers are shifting their habits and showroom expectations: Fully 83 percent of shoppers want to learn more about F&I products before entering a dealership, and, according to Experian, leasing continues to increase as a percent of total new sales – up to more than 30 percent. Incentives are up, used car values are weak, and according the NADA Used Car Guide, cars coming off lease will grow over 30 percent this year – to more than 3 million. 

Subprime is in that mix, as well. Stories abound about risky increases to the volume of subprime loans, as well as the length of term. In fact, a recent article published by 24/7 Wall St. reported that JPMorgan was planning to “pull back on auto loans with repayment periods of 84 months or more.”

We took a look at recent Dealertrack data to better understand credit application trends and activity, especially in the subprime space, and noticed a few myth-busting opportunities:

1. Millennials Don’t Buy Cars

They do. Last year Dealertrack found that Generation Y made up 35 percent of auto loan originations. Since then they’ve continued to become a powerful force in the market – larger than even their baby boomer parents – and their influence on the way cars are sold is unmistakable. Interestingly, Millennials are largely subprime customers: For September year-to-date, they made up 40 percent of unique subprime credit applications; their share of continues to grow over the Gen-X, Baby Boomers and Over 64 age groups.

2. The Auto Finance Subprime Bubble is Here

According to Dealertrack data, subprime auto risk has in fact remained consistent for the past 3 years.  Subprime application share, as a percent of total applications, has stayed steady at 35 percent of total credit apps. Case in point: in September 2016, 33 percent of applicants were subprime, compared to 62 percent in February 2007 – the highest month.  

3. Online Financing is Only for Customers with Bad Credit

Not anymore. One of the realities of the online to in-store transformation is that online financing behavior has shifted; consumers can now process an entire transaction online, from research to payment quotes and more. And while currently, 59 percent of online applications have a FICO of 599 and below, that’s changing as consumers adjust their behavior – and digital tools adjust. For example, MakeMyDeal’s digital retailing software draws a higher FICO score band.  

There’s no doubt that auto sales is changing from its rip-roaring pace of the last few years, while at the same time, the way consumers buy cars is also becoming more consultative and efficient. As dealerships head into 2017, it will be interesting to see how these changes manifest themselves. One thing is sure: as sales slow, the focus on process efficiencies and the need to over deliver on consumer expectations will grow.


Andy Mayers has over 20 years of experience in providing software to dealers and financial institutions.