How Sloppy Stip Collection Hurts Subprime Originations in the Auto Finance Industry

Lightico’s The State of Digital Lending in Auto Finance found that while all consumers want a more digital and less time-consuming loan application process, lower income and credit applicants in particular face excessive funding cycles and require more documentation. Very often, this group is the same group that applies for subprime loans — customers who have credit scores below 620. As a result, lenders are missing out on these crucial subprime borrowers, who are more likely to abandon their loan applications due to slow, paperwork-heavy processes along the way.

Subprime Origination Requires More Paperwork and Longer Time Funding

Subprime and deep subprime borrowers often represent the greatest risk to lenders. Therefore, it hardly comes as a surprise that these groups are required to fill out the most paperwork and submit the greatest amount of documentation when taking out a loan. According to our survey of borrowers, lower income individuals are more likely to report a time to funding that takes longer than three days (37%) compared to higher income individuals (29%). In addition, 41% of lower income applicants need to submit more than six documents during the loan process (just 32% of higher income applicants say the same).

Why a long time to funding is a problem

In our fast-paced, instant world, these paperwork requirements and the resulting long time to funding has a negative impact on borrowers, which subsequently hurts lenders. Unlike prime borrowers, subprime borrowers are under greater financial pressure, and have less control over their time. For example, many individuals in this category work in shifts that offer little flexibility or ability to know a schedule in advance. They are also less likely than higher income borrowers to have access to fax machines or scanners. If in the middle of their workday, their lender contacts them with an additional document requirement, such as proof of income or residence, it creates a tremendous burden. A loan application process that drags on doesn’t just impact the borrower: it’s a direct financial blow to the lender. The Lightico survey found that the number one reason customers abandon a loan application is overly long time to funding (42%). Another 62% of respondents attribute their loan abandonment to a poor digital experience, excessive touchpoints, and the requirement of going to a physical location. Notably, all of these factors are directly related to a long time to funding. We also found that consumers who wait over 48 hours to get their car loan approved are twice as likely to abandon their loan application. With more lower income individuals falling into this category of long wait times, that’s a significant blow to the subprime lending industry.

Auto lenders are losing subprime borrowers, but the opportunity is great

According to Experian, around 35% of Americans are subprime borrowers. Thanks to their sheer numbers as well as the higher interest rates attached to their loans, this represents a tremendous opportunity for auto lenders. Auto lenders must prevent subprime borrowers from abandoning the auto loan application cycle due to long poor stip collection processes, or risk losing them to competitors. Digitalization represents an excellent solution to this conundrum. Next-generation digital solutions allow lenders to collect all the needed stips from the customer, directly from the customer’s cell phone using their camera. This streamlining of the stip collection process, prevents the back-and-forth that traditionally comes with collecting missing documentation. Time to funding is significantly reduced, and loan application abandonment due to paperwork frustrations become a thing of the past.