Today’s consumer lending industry is steeped in tradition carved out over several decades. Although the general public – or anyone else, to be sure – doesn’t know all the factors that comprise the modern credit score, there’s a general understanding that a higher score equals more creditworthiness and better offers from lenders.
Conversely, a lower credit score – or no credit score at all – equates to subprime loan offers with unfavorable terms or in many cases, no ability to secure loans.
Unfortunately, while the latter category does include car buyers whose credit histories are questionable, it also includes consumers with stellar incomes and payment histories who simply haven’t had the opportunity to build sufficient credit according to traditional means. For example, a doctor who recently immigrated to the U.S. from a foreign country may not have a history that the credit bureaus track, leaving them with no credit score and no ability to secure financing for a car whose payments they can certainly afford.
Under traditional credit models, the only option for borrowers in this situation is to consider subprime lenders. A strong borrower should not be banished to the subprime category simply because traditional credit ratings don’t account for the entire picture.
Among the limitations of the current consumer lending model are:
- Old Methodologies. Although it’s seen as the industry standard, the FICO model is decades old and is limited in the scope of data it considers. New lending models from several new lending players see borrowers as “more than just a score,” analyzing thousands of data points to determine creditworthiness. While the data points will include FICO when a score is available, creditworthiness is judged in a much more holistic manner.
- A Lack of Transparency. The loan process is an often slow, analog and opaque process, especially for consumers. From application to signing the contract, more modern lending technologies allow for consumers to handle the entire process on their phones. The process becomes much more appealing for borrowers who prioritize transparency and speed.
- Complexity: Many lenders can pre-approve borrowers “quickly” based on a soft credit pull, but the formal approval process can move at a much slower pace. The technology exists to provide faster, easier approvals and funding; companies working toward transforming the industry are making use of such technology, making the process friendlier for everyone involved.
- Good Consumers Being Left Out. Would-be car buyers with no Social Security number, no ITIN, or thin- to no-credit histories are usually denied loans for vehicles they desperately need to be productive and successful. Rather than relying on a single source, such as a FICO score, to determine the consumer’s ability to secure a loan, companies are disrupting tradition by introducing never-before-seen levels of fairness, equity and opportunity through holistic approaches to the loan process.
- Buyers Getting Stuck with Non-Competitive Loans. Predatory loans with high rates, long terms and little protection are common for those who don’t conform to traditional credit scoring models. When consumers are limited in terms of their borrowing options, the outcome can be far worse than getting no loan at all. New models and technologies that consider a much broader set of data points eliminate the need to have a traditional credit score but doesn’t disqualify buyers from securing loans with competitive terms.
- Dealers Losing Opportunities. Car dealers have become accustomed to turning away car shoppers with thin to no credit history. This limits their revenue and creates bad feelings and reputations. Dispensing with outdated credit scores that only offer a narrow snapshot of a buyer’s creditworthiness allows dealers to turn those buyers into loyal, happy customers.
New methods can open new revenue streams, however. For new-car sales, margin contraction and limited profit potential are cyclical issues dealers face. New lending technologies offer guaranteed backends for franchise dealers. Further, while traditional funding leaves dealers waiting days to receive payment for the car, new lending partners make same-day funding the norm.
The consumer lending industry has relied on a legacy-based approach, but its limitations are becoming more evident, which means it’s time to rethink things and overhaul it in a way that’s more holistic, consumer-friendly and inclusive. It’s a win-win for everyone and a welcome improvement in an industry ready for change.
Amitay Kalmar (pictured, above left) is the co-founder and CEO of Lendbuzz, which provides auto loans to deserving borrowers, including those without a Social Security number, no credit history or thin credit.