A new approach to the 3 C’s offers a deeper, more accurate view of risk for subprime auto lending
Auto lenders are revising their marketing and risk assessment strategies, looking for ways to securely tap into this expanding market opportunity. That means they must find the fastest path to reaching the right consumers, at the right time, with the right offer—before their competition.
Could improving the accuracy of bad rate assessment in the subprime score range help?
Many lenders are returning to such traditional lending guidelines as the “Three Cs” – credit, capacity and collateral. It is generally accepted that problems in any of these areas can result in loan default, but for very different reasons. Auto lenders have historically embraced the three Cs as a risk measurement tool through traditional credit scoring, DTI ratios to address capacity, and vehicle value to address collateral. However, during the peak of the recession these measures didn’t prevent a rise in delinquencies, so a reassessment of the approach is warranted to ensure underlying risk patterns are addressed as effectively as possible. Leveraging alternative data can also offer a more accurate view of risk.
Through enhancing the 3 C’s, the benefits to subprime auto lenders are many, including:
- More competitive pricing as a result of more accurate risk assessment
- Ability to further mine subprime risk bands — without sacrificing credit quality — by balancing traditional credit risk with affordability
- A more competitive risk strategy that enables the servicing of consumers that other lenders reject
- Comprehensive, more accurate risk management that more precisely measures capacity, at the portfolio level, for all loans
- Less manual intervention via automated assessment
To read the whole story on this new approach to how the 3 C’s can offer you a deeper, more accurate view of risk for subprime auto lending, please access this white paper.