NAFCU Services Blog

By:  Open Lending

After a year of volatility, market factors are starting to normalize. Jobs are growing and interest rates are holding (for now). But many Americans — particularly those in the near- and non-prime credit segment — still face unaffordable car prices and rates in their pursuit of vehicle ownership. 

To better understand these obstacles, Open Lending surveyed 1,042 U.S.-based near- and non-prime consumers on their experiences with car ownership and the lending process. The findings show that these consumers are careful about debt and confident in their financial futures but wary of the lending process. Though this segment wants to purchase a car, many doubt their ability to secure an acceptable loan or find it difficult to trust lenders.  

The combination of a stabilizing economy, pent-up vehicle demand and fractured trust in lenders offers an opportunity for credit unions to build on their mission and connect with this underserved audience. Credit unions can increase their community impact and improve long-term profitability by understanding near- and non-prime consumers’ pain points and offering financing opportunities that fit their needs. 

Read on for key learnings from our 2024 Vehicle Accessibility Report to help you engage with near- and non-prime members. 

Finding 1: Near- and non-prime consumers are demonstrating all of the buying signals that indicate readiness to buy cars and are proactive about managing debt, but high interest rates and car prices are pushing them out of the market. 

Despite being labeled as a risky borrower segment, near- and non-prime consumers are often more creditworthy than their credit scores show. Our survey findings support this, with respondents reporting a careful approach to vehicle financing: 69% plan to pay off their automotive loan early, and 77% haven’t been late on a payment in the past three years. When asked how they prioritize bills, respondents ranked their automotive payments at the same level as housing costs. 

Near- and non-prime consumers see bright horizons, with 74% optimistic that their financial situation will improve over the next year and 63% planning to purchase or trade in a vehicle within two years. Still, many near- and non-prime consumers lack the necessary credit or funds to buy a car. More than half (54%) of non-car-owners listed “I can’t afford one” as their primary reason for not owning a car. 

As the used car supply remains relatively low, dealers can be expected to more aggressively market to consumers who are in an equity position of their current vehicle and/or have paid off their loan as a means of acquiring inventory. To prevent consumers from being pushed out of the market, credit unions must use tools to offer affordable rates. It has the potential to pay off not only in increased ROA but also in member loyalty: 70% of near- and non-prime car owners who secured vehicle financing are likely to return to the same lender for other services, like a mortgage or business loan.  

Finding 2: Near- and non-prime consumers feel the sting of lenders’ focus on credit scores. For some, this makes it hard to trust banks and credit unions, leading them to pursue alternate paths to car ownership. 

More than half of respondents don’t trust financial institutions to offer honest, reasonable terms on automotive loans, with some reporting they have experienced bias in the lending process due to their credit score. 

This lack of trust may be why many near- and non-prime consumers are looking beyond automotive loans to buy a car. One-third of all car-owner respondents purchased their vehicle outright, with 38% doing so to avoid debt and 21% to forgo monthly payments and fees. An opaque, lengthy lending process also leads consumers to explore other options. Nearly half of respondents said securing the right interest rate is the most confusing part of the automotive lending process. 

To truly serve their communities, credit unions must look beyond traditional credit scores to deliver accurately priced loans that consumers can say yes to. Consumers in our latest study, particularly thin-file and younger, Gen Z consumers, cited their financial management behaviors that they feel is not reflected in their credit scores. Utilizing robust alternative data in addition to credit scores to measure creditworthiness enables lenders to build long-term member trust and contribute to a brighter economic future. 

Finding 3: Gen Z near- and non-prime consumers are careful about vehicle purchasing decisions. Offering loans to this cohort is key to securing long-term relationships with future prime borrowers. 

Gen Z is gaining a reputation as a financially cautious generation, and their approach to vehicle ownership is no exception. This age group is hesitant to take on unfavorable loan terms and is quicker to purchase a car outright. 

Compared to other age groups, Gen Zers opt for more manageable loan repayment terms. Sixty-one percent of those aged 18-42 have a term limit of 48 months or less, compared to just 42% of those aged 43-68. Of the Gen Z respondents who purchased their vehicles outright, 22% did so because they were unsatisfied with the loan rate or repayment terms.  

Gen Z’s reluctance to take on additional debt is particularly evident when looking at the popularity of leasing a vehicle. Seventeen percent of Gen Z near- and non-prime car owners currently lease compared to just 4% of those over 42. 

While financial institutions across the board are seeking out younger depositors, many are overlooking the importance of car loans. Reaching Gen Z with tailored financing opportunities is crucial for credit unions who want to build relationships and drive long-term profitability, as car loans play a key role in upward credit mobility for young consumers.  

The Path to Accessibility 

This research illustrates the impact of the current economic climate on near- and non-prime consumers and their ability to access car ownership. As our previous research revealed, it’s not that this segment doesn’t understand the value of vehicle ownership or its impact on their livelihoods. However, affordability barriers have worsened, opening the door for credit unions to redefine creditworthiness and increase vehicle access.   

By extending automotive loans to more near- and non-prime consumers, credit unions allow them to build a strong credit history. Many near- and non-prime consumers have a favorable credit trajectory, meaning that when credit unions serve near- and non-prime today, they’re securing prime members for tomorrow. 

You can access the full 2024 Vehicle Accessibility Report here.