Implementing the right credit and affordability checks are crucial in auto finance

The automotive landscape is constantly evolving with an increased focus on the consumer and their car buying experience. The factors driving this are the uptake in digitisation of customer journey since the pandemic and the shift to an omnichannel approach, as well as the tightening of regulations from the FCA around products and services offered to consumers and the role of consumer duty.

One of the main areas for improvement has been the finance applications and how to handle different profiles of customers.

This blog discusses the importance of protecting consumers in this space and improving efficiencies.

Consumer and market changes

Since the pandemic, we have experienced significant economic changes and consumers have proven to be resilient as credit activity remains at a healthy level of approximately 9% of the population making at least one credit search in the last 12 months. Although, as the initiatives to support people during the cost of living have now reduced we are seeing the quality of applications dropping back down to pre-pandemic levels.

As the profile of customers is changing and there is increased scrutiny from the FCA, it is important to improve transparency during the finance application process. Organisations must ensure consumers are at the heart of decision making, any products or services offered are clear and the consumer is informed and able to make decisions about their finance options. One factor for brokers and lenders to consider during this process is prequalification in the application stage.

What is prequalification?

There are two types of credit searches – hard and soft. The soft search allows lenders to perform a credit check on consumers who are looking for a loan without impacting their credit report. We call this prequalification as brokers and lenders can qualify consumers in or out of the full application or manage their expectations with a percentage likelihood of being accepted. If the consumer chooses to commit to a lender’s offer and submit their full application, then this is where the hard search is requested. The hard search impacts a consumer’s credit report and if declined stays on their report for up to 12 months.

Over the last year within the auto market, 29% of consumers made 2 or more applications for credit – with some making as much as 10 or more. These are all hard searches and multiple declines mean the consumer is less likely to be successful in their application for credit as other lenders can see a number of attempts being made and rejected. This can impact their car purchase but also any further credit requirements such as mortgage or a new kitchen.

Whilst credit history is an essential check, understanding the consumer’s budget and ability to keep up the repayments is another factor to consider as part of consumer duty.

Why use affordability?

Affordability is also becoming increasingly important as consumers are experiencing increased costs, a reduction in their savings and incomes are rising more slowly. Previously a good credit profile would have been highly likely to have been accepted but now affordability is equally as important to assess whether they can sustainably meet the repayments.

Having an accurate understanding of their budget ensures there are no unrealistic expectations and the right vehicle package is created for the consumer. This personalised approach provides a more positive customer journey which can be frictionless when the finance element is understood early on.

Find out more about Experian Auto Engage Plus.

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For more information on prequalification please get in touch.

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Post tagged in: Affordability Checks, Consumer Credit Data