A new report from Open Lending and TransUnion dispels the myth that many thin-file consumers, especially Millennials and Generation Z, are more risky. By digging deeper into available data, lenders can identify profitable consumers who will reward that institution’s faith with ongoing business.

Millennials and Generation Z are twice as likely to be thin-file consumers than older groups, but there’s more behind the scenes. More millennial and Generation Z thin-file consumers (30%) become established consumers within two years than Generation X and older thin-file consumers (22%). Millennial and Generation Z consumers advance credit tiers more quickly than older ones.

Senior vice president of marketing Kevin Filan said that Open Lending leverages 23 years of data to provide a more comprehensive view of risk that allows lenders to safely serve a wider range of applicants. Working with lenders to set unique parameters, Open Lending helps them price and structure loans that more accurately reflect applicant risk. Those loans are backed by default insurance.

Today’s environment is challenging for younger thin-file generations. Filan said liquidity has tightened, forcing many lenders to the perceived greater safety of prime. That’s underpinned by the faulty logic that everyone is sub-prime because there is something wrong with them. Often millennials and Generation Z enter the credit markets later. Combined with tighter times, it makes it hard to move from thin-file, defined as two or fewer credit lines, to thick-file, which begins at three.

Why car loans are important credit-building tools

Car loans play a crucial role in their move up the credit rating spectrum. As they progress, millennial and Generation Z thin-file consumers prioritize them. The second credit file for 74% of them is a car loan. Even more, 90%, of newly established Generation Z and millennial consumers maintain an auto loan. They are 33% less likely to be more than 60 days past due on automotive loans than Generation X and older thin-file consumers.

“The big delta between between the 631 and the 739 averages is an auto loan,” Filan said. “It’s a rung on the ladder that they need access to, that needs to be priced correctly. 

“But lenders are pulling back. Our contention is that you’re pulling a rung away from that consumer buying cycle.”

Complementing the traditional credit score with new tools

Lenders get a more comprehensive risk profile when accessing Open Finance’s database of more than two million risk profiles. Filan said it includes consumer data, national and regional data and vehicle value should it be repossessed. Consumer data predicts the likelihood of default, while collateral data predicts when it is likely to happen.

The process doesn’t conflict with the traditional credit score, it builds on it by looking more deeply at more data, with AI’s help, to make better decisions. Filan said it helps lenders to be fair and consistent in their pricing.

While many say they use AI, Filan said Open Finance actually does. It’s helped them deliver better than 98% accuracy in predicting prepayment. It also helps with assessing default risk and its possible severity.

“We’re predicting the probability of prepayment, the probability of default and the severity of default,” Filan said. “Once you’re able to have your handle on what those are going to look like, you’re able to better structure pricing decisions of a loan. We’re able to allow them to buy deeper in the credit tier and provide more flexibility on the overall loan-to-value piece.”

Millennials, Gen Z are confident consumers

Millennial and Generation Z consumers are confident in their ability to maintain their obligations. Filan said 74% expect to have a better financial situation in the year ahead, and 70% expect to pay off their car loans early.

Yet they were hit with higher interest rates on auto loans disproportionately more than other tiers. The percentage of borrowers paying more than $600 per month on a new car loan more than doubled to 79%, while the percentage paying more than $600 on a used car loan more than tripled to 25%.

“When we look at the rate increase and the monthly payment increase, something unusual is going on,” Filan said. “The explanation we believe is that there’s a perception of risk if they don’t show up as prime. And so they’re disproportionately getting a higher rate quoted as liquidity was tight and perceptions of risk were there. 

“What we’re trying to do is spell out for the industry that you have to look beyond just the traditional credit score to properly score an applicant, and if you don’t do, that you’re at risk of missing out on critical support that the near-prime, especially younger consumer needs in order to continue to build wealth and to build other overall credit profile.”

Millennials, Gen Z reward your faith with their business

There are clear rewards for those who extend the extra effort. Additional Open Finance research showed that 83% of millennials and Generation Z consumers who had a positive auto loan experience would return to that institution for future needs. Auto loans are key parts of younger generations’ credit-building journeys.

Provide younger borrowers with a fair and transparent experience, aided by automation and more data. Do it consistently and accurately,  and Filan said you will win their business.

EV loans are a growing issue

Filan said this process can help the auto industry contend with the challenges of meeting federal and state mandates to put more electric vehicles on the road.

“The industry’s got to get a real sense of how to think about how they do loans in the EV space because penetration, once you get below prime, it’s down at the 5-6% level. The mandates that are being put in place federally and at the state level, there are many that can’t be met if there’s not the ability to extend credit to non-prime and near-prime consumers in particular. 

“That’s something that the industry has yet to crack the code on.”