Nonprime Auto Lending in 2021

The early months of 2020 for the automotive industry were, in a word, difficult. The coronavirus pandemic slowed car sales and auto loan growth, but now at the one-year mark, improvements appear to be on the horizon. However, the types of loans banks and credit unions make may begin to shift.

According to the 2021 forecast from TransUnion, new auto sales are expected to flatten in 2021 after they suffered a double-digit decline and negative growth rate in the first half of 2020. During the second half of 2020, bargains and incentives from automakers alongside increased demand for vehicles drove sales in that period, Automotive News reported, but most of that growth was from prime borrowers.

TransUnion’s forecast also predicts that loan origination will be strong and healthy in the first two quarters of 2021 with 6.8 million new accounts in Q1 and 7.4 million in Q2. As the economy and auto lenders’ begin to recover, originations are expected to shift up toward the prime range and higher-margin nonprime loans will decrease.

While underwriting standards can have an impact on nonprime loans and borrowers, that is not the only factor. In an Automotive News interview with senior vice president and automotive business leader at TransUnion, Satyan Merchant, he said that the coming slowdown of nonprime loan originations “isn’t likely to stem from auto lenders tightening their underwriting practices. Rather, a slowdown in demand from consumers in these credit tiers will curtail purchases in the new year.”

So, what is to ultimately become of nonprime auto loans in 2021? Many pieces are in play. In a Filene Research Institute study, it found younger generations are buying cars later in life, ride share services are growing, as is usage, and whether wealth inequality shrinks or the economic recovery continues on a “K-shaped” path all have a role to play with regard to auto loan portfolio growth.

The path for auto lending in 2021 may be unclear, but whatever comes next, your financial institution can take on more auto loans with less risk using Open Lending’s Lenders Protection™ program! Click here to learn more.