High Prices And Risky Credit May Steer Buyers To Older Used Cars; Dealers, Lenders Adjust

By process of elimination, older used cars are becoming the purchase of last resort for bargain-hunting shoppers and those with subprime credit scores, analysts said.

Therefore, auto dealers and lenders are having to move with the market, to sell and to finance, respectively, older used cars than they are used to — vehicles that historically might have been difficult to get financed except at “buy-here, pay-here” dealerships that make and collect their own high-risk, high-interest loans.

For example, Open Lending Corp., a service provider based in Austin, Texas, whose biggest customer segment is credit unions in the auto lending space, recently extended its offering to include up to 11-year-old used cars, up from a previous allowable ceiling of 9-year-old vehicles.

“Over the years, we have seen things change in the market,” said Matt Roe, Chief Revenue Officer of Open Lending, in a phone interview. “The last couple of years, the average age of vehicles financed has gone up pretty drastically.”

According to Experian Automotive, customers at the risky end of subprime are already nearly priced out of new vehicles. Experian Automotive says only about 5.4% of new-vehicle loans in the third quarter of 2022 were to borrowers with credit scores of 600 and below.

In the third quarter of 2020, before the pandemic and the ongoing computer-chip shortage, it was about 7.8%, Experian Automotive said.

Borrowers with subprime credit are also losing share of used-vehicle loans. High new-vehicle prices and limited choice among new vehicles drive many prime-risk customers to newer used cars, analysts said.

Despite the name, Open Lending isn’t a lender. Rather, it offers lenders analytical horsepower for making loan decisions, and adds default insurance, which helps mitigate risk in higher-risk credit tiers, Roe said.

And while Open Lending increased the maximum age of used vehicles it’s willing to facilitate, at the same time it kept its caps on allowable mileage, and that also mitigates risk, he said.

“What we found was, as long as mileage is consistent with previous guidelines, comparing an 11-year-old car with 100,000 miles, vs. a 9-year-old car with 100,000 miles, the risk of frequency of default is the same,” Roe said. “We stuck with our previous mileage guidelines.”