How F&I process looks to carless consumers

Thirty-five percent of consumers without cars think the process of buying and financing vehicles is "opaque" or lacking transparency, according to Open Lending, which said this creates an opportunity for lenders.

Almost 8 percent of non-car owners called the process "extremely opaque," and 27 percent called it "mostly opaque" in September polling of 597 car owners and 750 consumers without a vehicle. The results were released in December.

The majority of the carless respondents — 55 percent — called car buying "mostly transparent."

Open Lending said respondents who don't own a car and who have poorer credit were more likely to perceive a lack of transparency, noting 40 percent of consumers with 501-600 FICO credit scores felt this way compared with 36 percent of those with scores of 601-660.

Open Lending Chief Revenue Officer Matt Roe, whose company develops default insurance for creditors, attributed the transparency findings to the financing part of the car-buying process. It stems from customers feeling they would not qualify for a loan, he said during a December webinar.

Roe said in his company's experience working with lenders, particularly with regard to near-prime and nonprime borrowers, consumers are "almost conditioned to think that they're not gonna get approved."

Customers also don't think they can afford vehicles, according to the study. Forty-eight percent of the carless population surveyed called affordability their No. 1 reason for not having a vehicle.

"This is expected in today's financial climate," Open Lending Marketing Vice President Cody Gillund said during the webinar. Affordability will likely improve in 2023, but higher interest rates and insufficient inventory to produce prepandemic pricing mean affordability will remain an issue, she said.

Half of millennials — ages 26-41 — without a car said they couldn't afford one, and 52 percent of carless Generation Z consumers — 18-25 — felt similarly, according to Open Lending.

Lenders able to assist customers who see the car-buying process as unclear or confusing have a "white knight" opportunity, Gillund said. Open Lending's study revealed 83 percent of consumers without vehicles said they would use the same lender for other financial services if they had a good auto loan experience.

"That's really, really impactful," Gillund said.

Lenders can launch a long-term relationship with a consumer by offering a simple and transparent loan process to subprime and nonprime borrowers, she said.

Roe told Automotive News the survey's finding on lender loyalty "absolutely" applied to direct-to-consumer lenders seeking to capture business. He said some large direct lenders have driven away customers without prime credit scores, who have been "almost trained" to use competitors or pursue auto loans at dealerships.

But Roe said he thought lenders also could convert a previously indirect customer — one brought to the institution through a loan arranged by a dealership — to one who would seek out the creditor on future loans.

"The most unloyal consumer of credit is the prime borrower," Roe told Automotive News. They'll use whichever lender has the lowest rate, he said.

But a consumer with weaker credit who had a good loan experience with a particular financial institution would be likely to return to that lender because their credit would still be flawed, Roe said.

Lenders might need to rethink their strategies to achieve the kind of success Open Lending suggests.

"We have seen many lenders over the years try to serve the near- and nonprime consumers only to fall short," Roe said in a statement. "Often these lenders will place stipulations or conditions on the loan, limiting the consumer's ability to accept the loan as approved. Ultimately, the consumer ends up at a dealership and presents their desired monthly payment only to be backed into a loan that is the most profitable for the dealership, regardless of the best rate for the consumer."

Roe told Automotive News the problem wasn't documentation stipulations but rather lenders setting loan conditions which fail to take into account the situation of weaker-credit borrowers.

A lender might demand a 20 percent down payment, but a nonprime customer might not have access to that kind of capital, Roe said.

"It's sort of removing some of those hurdles and pricing for them [with interest] in a way that accounts for no down payment," Roe said. Offering longer loan terms to reduce monthly payments is another tactic lenders could adopt, he said.

Customers with weaker credit are "payment shoppers," Roe said, while a customer with a prime credit score would "dump you over the rate in a heartbeat."