Ford Altering Credit Modeling Using Artificial Intelligence

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In a recent press release from Ford, the car manufacturer announced they teamed up with ZestFinance to conduct a study to determine whether artificial intelligence (AI) machine learning could better predict credit risks for auto financing using a number of different factors beyond credit scores. The overall objective was to analyze more data differently from just pulling a credit report and score.

The new AI credit approval system does look promising, as it had better predictability to determine credit risks. In the past, Ford Credit has used different propriety models to evaluate credit risks. The current models have resulted in better assessments of credit applications, which has allowed Ford to minimalize credit losses.

Currently, Ford has the lowest car financing charge-off rates, compared to the other major automakers. Ford’s hope is their new AI credit modeling will help better predict potential losses, while at the same time take into account new car buyers with little or no previous credit histories.

How Ford’s New AI Model Helps Car Buyers

Based on data collected by Ford, one in ten people have no previous credit. In addition, roughly twenty-nine percent of auto sales last year were made by millennials. Ford anticipates sales to millennials to grow by as much as forty percent by 2020.

Using traditional credit methods for new car financing involves pulling credit reports and credit scores from the major credit bureaus. Then, the scores between the three agencies are averaged to determine whether financing can be approved, as well as the interest rate of the loan.

The traditional model presents challenges for automakers and car dealerships as sales have started to decline this year. There is a growing number of millennials who want to purchase new cars, but who either have no previous credit or very little credit history. With the traditional model, they are either denied or lumped into high-risk loans with higher interest rates.

The new AI model Ford is working on would take into account the important millennial market segment rather than just base loan approvals off whether someone had a credit history and score. Instead, the learning aspect would evaluate other criteria, such as whether the applicant paid their rent or mortgage on time, and factors to better predict risks and determine approvals.

Will There Still Be Risks?

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Even with the new AI credit modeling, there will still be some risks. However, the adaptive machine learning intelligence will keep reducing those risks going forward. At the same, it will also open more opportunities for millennials and other people who either have no credit or very little credit to get approved for a new car loan.

It is important to keep in mind that Ford is not completely discarding credit scores with its new AI system. They will still play a role; it’s just that the new system will take into account additional factors to reduce the risks of defaults and for more accurate approvals.

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