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Credit Overhaul: Why Millennials Demand New Underwriting Strategies

  • William Hoffman
  • May 3, 2017
  • 1

Powersport dealers see young millennials come into their stores all the time looking for the largest, fastest, most-expensive sportbike on the market. That’s when the warning light starts flashing in a lender’s head.

“They start all gung-ho: They want the Suzuki Gixxer, they want the Honda CBR, anything that goes fast and looks really cool — all their buddies are doing it, and they do wheelies down the road.” said David Goff, assistant vice president of marketing at Westlake Financial Services. “They are constantly trying to get too much bike,” Goff said. For example, a millennial buyer might have a friend who owns a Kawasaki Ninja 1000, and the buyer immediately wants to purchase that particular motorcycle, too.

Unfortunately, because the buyer has no credit or thin credit, that person qualifies for an older or lower-cost bike, such as the Kawasaki Ninja 300 or 600, he added.

So how should lenders approach this demographic?

It’s never good to put a consumer into a deal that goes beyond their means, he said, but it’s especially bad for young riders who are more prone to get in an accident. The lender may ultimately have to collect on the asset, a difficult task if the bike is destroyed in an accident by an inexperienced rider or, more importantly, if the rider is hurt.

“It’s a problem for the lenders, because sportbikes are riskier, and a younger audience that doesn’t have as much riding experience is more inclined to have an unfortunate accident,” said Emre Ucer, managing partner at MotoLease LLC. “We try to encourage young audiences with no experience to start with a small cc engine size, and work their way up to the higher cc bikes as they gain more experience.”

This all-too-common behavior in regards to purchasing, underscores that lenders and dealers alike are changing in order to appeal to the new largest buying demographic — millennials. Some of that change is being made in underwriting to onboard more millennial consumers who have fewer lines of credit because they are flocking to urban centers, relying on public transit, and renting homes instead of buying, several sources told Powersports Finance. On the other hand, the ever-persistent problem of upgrading technology in powersports will continue to be a challenge for dealers and lenders.

“The whole industry has grown a lot over the last eight to nine years back to decent levels,” said Chuck Smith, vice president and chief lending officer of Texas Dow Employees Credit Union (TDECU). “But, it’s more than just underwriting, it’s understanding what that generation is going to look like, as it ages and matures.”

Underwriting for Millennials

Two and half years ago, Westlake entered the powersports market looking to capture a lot of these young thin-file borrowers — consumers who haven’t necessarily defaulted on previous loans, but have just never established many lines of credit. Westlake “probably came in a little hot with an unproven risk model” because it didn’t yet understand the differences from the auto world, Goff said. Now, Westlake spends more time to work with dealers to place millennials in the right bike.

“The good dealers know how to prequalify that customer up front and show them the alternatives and say, ‘Look, to do this you’re going to need X amount down to prequalify,’” Goff told Powersports Finance. “‘If you don’t have enough we can look at this smaller bike and get you riding today, and in a year or two, or three, you trade that bike back in and we’ll get you on that big bike when you’re credit comes up.’”

Even if millennial consumers are connected with the right bike, thin-file consumers are still more risky, and TDECU’s Smith said he is less willing to go down the spectrum to capture millennials, unless there are alternative methods to determine income.

“For powersports, you want to see someone with established credit,” Smith said. “That is not something you want to jump into — someone that has not established credit or the ability to pay bills over time. You want to verify, whether that’s through credit reports or other ways.”

For consumers who don’t have much past credit history, it’s “challenging” to structure an appropriate deal because lenders rely so heavily on that history for their underwriting, said Todd Nelson, business development officer at SunTrust Banks Inc.’s online consumer lending division LightStream. Others, such as MotoLease, have been more willing to go after thin-file consumers.

“That audience is one of our sweet spots, and a large part of our portfolio is thin-file,” Ucer said. “There is a lot of need for credit education and credit guidance, but if you treat them right, guide them, and show them the importance of the credit in the long run, they perform very well.”Some of that training includes getting borrowers to talk with risk advisors, and MotoLease may soon add a program that pays for riders to take motorcycle safety classes if they complete a certain number of sessions.

With the proliferation of the sharing economy, the powersports industry might look to emulate mobility services in the automotive industry, TDECU’s Smith said, such as ZipCar — which makes its own fleet of cars available for subscribers to use around cities for days or hours at their convenience.

“The millennial generation doesn’t believe in idol assets, and boy, talk about an idol asset — a $20,000 motorcycle and you ride it four times a year,” Smith said. “The biggest challenge is going to be for the OEMs in how they want to own those assets, which will translate to us as lenders.”

EagleRider, for example, offers a more traditional rental service for motorcycles, and startup Riders Share offers a peer-to-peer marketplace for motorcycle owners looking to get more use out of that idol asset. Programs like these may be more advantageous for consumers — especially young ones — in large urban areas, but these programs attract older consumers in cities as well, because it’s a lifestyle choice and geographic reality, Nelson said.

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