Rising interest rates have caused alarm in the auto industry as the average rate reaches pre-recession levels and 0 percent financing offers continue to dwindle. But they haven't kept every consumer group from the market. The bookends of the credit spectrum — those with the highest credit scores and those with the lowest — are boosting their share of loan and lease originations.
Subprime, superprime and prime-plus customers increased originations the most among the credit tiers and took market share from prime and diminished growth for near-prime customers in 2018, according to TransUnion's latest Industry Insights Report. Here's how market share by credit tier fared from 2017 to 2018:
- Super prime (scores 781 and above) increased 3.4 percent.
- Prime plus (721-780) increased 2.8 percent.
- Prime (661-720) decreased 0.9 percent.
- Near prime (601-660) increased 0.2 percent.
- Subprime (600 and below) increased 2.4 percent.
The shrinking share of auto originations by customers in the middle is likely driven by interest rate hikes, according to one finance expert. Prime and near-prime consumers are likely balking at increased vehicle costs, prompting them to temporarily pull out of the market.
Meanwhile, customers in higher credit tiers are often less affected by rate increases and have more financing options, according to Brian Landau, senior vice president and automotive business leader at TransUnion. As low-risk customers, they are more likely to receive multiple offers from direct and indirect lenders than other customers. As a result, he said, they can shop for the best rate even in a rising interest rate environment.
Subprime borrowers, on the other hand, are probably least sensitive to rate hikes because holding out for a better offer may not always be possible. Relative to borrowers in the highest credit tiers, subprime consumers have fewer options, Landau said.
"Subprime consumers might also be in greater need of a new vehicle than other consumers but don't have the luxury of time to shop around for the lowest rate," Landau said. "In the end, they take what is offered to them at the dealership."
Another reason subprime market share is growing may be that many dealers are pursuing those shoppers to broaden their customer base. Some dealers say automakers are offering targeted incentives for customers below certain credit thresholds to drive sales.
Prime and near-prime borrowers, sandwiched between the fastest-growing segments, are sensitive to rate hikes but lack the buying power of superprime and prime-plus consumers.
There's also a possibility that customers have been climbing credit tiers. Increased awareness of their credit history and better credit performance could explain a migration of prime customers to prime plus.
No matter the reason for the market share fluctuations, auto dealers should take note that many customers with prime and near-prime credit are on the sidelines. Dealers should help these customers, along with subprime and superprime borrowers, get an attractive offer to bring them back to the market, even amid challenging economic factors.