Is alternative credit data the key to a new car for millennials?
In 2015, ID Analytics debunked the myth that millennials were less interested in traditional forms of credit by demonstrating that they were applying at higher rates for credit cards and auto loans than any other generation yet were more frequently declined.¹ Fast forward three years and data from a major auto lender validates this trend has continued, with 39 percent of applications coming from millennials and only a nine percent booking rate (see Figure 1). According to Automotive News, millennials will likely represent about 40 percent of the U.S. new-vehicle market by 2020.² Alternative credit data might be what’s needed for lenders to help dealers say, what can I do to get you in this car today?
Figure 1. Major auto lender comparison of application versus acceptance rates 2017
The generation known for delaying obtaining a driver license (a study by the University of Michigan found that 60% of today’s 18-year-olds have a driver’s license, compared with 80% in the 1980s)³ and having car ownership delayed due to difficulty finding jobs during the Great Recession,⁴ is coming of age. In 2016 millennials purchased 4.1 million vehicles in the United States, accounting for 29 percent of the market.⁵ Millennials are the largest generation in the U.S., spanning different ages and life stages. While they are becoming a more prominent presence in the auto market, are some lenders’ credit underwriting policies still overlooking this fast-growing segment of vehicle buyers?
ID Analytics research demonstrates that millennials are seeking access to credit and they can represent a high lifetime value to lenders, yet they are disproportionately declined due to traditional credit score calculations that favor consumers with more established credit behavior.⁶
Traditional credit scores include mortgage, credit card, auto loan, and other installment loan payment history. This limited view can hinder enterprises from understanding the true risk of applicants with limited or no credit history. Using a score that includes alternative data from wireless providers, marketplace, or other online lenders along with traditional credit data can provide a more complete picture of a consumer’s risk profile. Alternative data scores can be more predictive in the very industries millennials are seeking to start their credit relationships—like auto loans.
The upside for millennials seeking credit is that auto lenders are increasing their adoption of alternative data. During this year’s AFSA conference the senior vice president for risk management at GM Financial, said his company has been using alternative data for eight years to help approve loans across the credit spectrum.⁷ A straw poll conducted during the show revealed that 50 percent of auto lenders are already using alternative data and an additional 18 percent are implementing or testing it today.⁸
As millennials graduate from college and start their careers, not to mention their families, they are increasingly going to be in the market for auto loans. As lenders, this is and will be an important consumer segment to engage. For more information about how alternative credit data helps auto lenders routinely score more than 80% of thin-file and no-hit credit applicants read our case study, Fueling Auto Lending with Alternative Credit Data.
Jason Heil is the Principal Product Manager, Credit Risk Solutions at ID Analytics
1. ID Analytics White Paper, Millennials: High Risk or Untapped Opportunity? May 2015.
2. Automotive News, http://www.autonews.com/article/20170227/RETAIL/302279963/the-millennials-are-coming (accessed May 18, 2018).
3. Los Angeles Times, http://www.latimes.com/business/autos/la-fi-hy-millennials-cars-20161223-story.html (accessed May 18, 2018).
4. Automotive News, http://www.autonews.com/article/20170227/RETAIL/302279963/the-millennials-are-coming (accessed May 18, 2018).
6. ID Analytics White Paper, Millennials: High Risk or Untapped Opportunity? May 2015, p.7.
7. Automotive News, http://www.autonews.com/article/20180328/FINANCE_AND_INSURANCE/180329647/alternative-data-ai-will-shape-lenders-decisions (accessed May 18, 2018).