What’s impacting your auto lending business?
Six trends, challenges and projections impacting your auto lending business
By Chris Harper, Senior Director, Membership | Filene Research Institute
Across the credit union system, auto loan growth has flattened in recent years. Consumer preferences, economic conditions, competition, and technology has been shifting since long before the start of the COVID-19 pandemic. Even under normal conditions, these changes are nothing to ignore, especially when vehicle financing through auto loans makes up a significant fraction of credit unions’ loan portfolios. But what does a flattened market and a shifting environment added on top of a life-changing pandemic mean for credit unions when it comes to their auto lending business?
While I can’t predict the future, as much as I wish I could (hello, lottery tickets!), I can tell you from my years of experience working in credit union, auto lending and technology fields, what the trends I’m seeing are pointing toward, what Filene’s research on auto loan trends and challenges are projecting for the impact to the industry, and what you should be planning to do about it.
First, this goes without saying, but I want to be very clear: a solid understanding of current auto trends has never been more important. In addition to auto loans making up a significant portion of credit unions’ loan portfolios, a robust auto loan portfolio offers an asset that allows your credit union to be responsive to the interest rate market without the long-term risk inherent in the mortgage space.
The strange case of 2020
The average auto loan stays on the books for just under 39 months ensuring the ability to constantly refresh these assets with new ones at current market rates. We are coming off two of the strongest auto sales months in recent history (April & May 2021), and new car sales are trending close to 2019 — or pre-pandemic — levels (16.7M vs 17.0M).1
A major indicator of overall economic health as you may know, is new car sales. In 2020, this dropped to 14.7 million sales vs 17.0 million in 2019. Overall auto sales were down 14.6% in 2020 because of COVID. This compares to only a 9.9% drop in retail sales.2
Due to factory closings during the pandemic, inventory levels are extremely low. New cars are down 59% from 2019 levels while used inventories are down a more modest 14%.3 These tight inventories are driving up retail prices in both segments. Credit unions need to be responsive to loan requests that may exceed existing loan policy guidelines in the near term.
A new competitive landscape in 2021
To date in 2021, we are seeing a drop off in zero percent offerings from the manufacturers (down to 6.7% of new financed vehicles from a high of 21% at the end of 2020).4
This makes for a more competitive landscape in which credit unions have the chance to thrive in the auto lending game once again. Expect to see this trend continue until manufacturers rebuild new inventory levels.
This supports one of the key trends and patterns surfaced in Filene’s recent report Auto Loans and Credit Unions: Trends, Challenges, and Projections (filene.org/531), indicating that credit union auto loan growth will slowly return to the long-term average of 6% (4% adjusted for inflation).5
- Credit union implication #1: If your auto loan portfolio needs to grow, consider how your credit union can better compete with captives and banks for auto loans. Common options include offering your members longer terms and competitive rates, better advertising of your loan offerings, and deepening relationships with auto dealers. Reach out to members of underserved communities who may be overlooked by competitors and who may often offer safer credit profiles than is usually assumed by standard credit scoring models. Pay close attention to members hit particularly hard by the pandemic. In addition, develop analytics capabilities to provide targeted loan offerings to members likely to be preparing for a car purchase.
Another reality to call out is this — electric vehicles are here to stay. In the first quarter of 2021, electric vehicle sales grew 44.8% year over year and accounted for 7.8% of all new vehicle sales.6
- Credit union implication #2: Begin preparing for the growing adoption of electric vehicles and the eventual adoption of autonomous vehicles. Offer home equity loans to help members install home electric vehicle charging systems. Refer to Filene’s research on Consumer Insights on Autonomous Vehicles as an Impending Market Disruption (filene.org/449) for more on how your credit union can prepare for the autonomous vehicle market.
As of Q4 2020, leasing made up over a quarter of all new vehicle sales.7 Exploring a lease program offers advantages to your membership while also ensuring a consistent rate of return.
- Credit union implication #3: Offer Lease Alternative Loans, also known as vehicle alternative loans or lease-like loans, which provide the flexibility of a leased vehicle experience with better terms for members. Members keep the vehicle title, enjoy shorter payment terms, and lower payments.
After a slight drop in sales in 2020 (2.6%) motorcycle sales have seen a resurgence, up 33% in Q1 20218, which leads me to…
- Credit union implication #4: Increase alternative lending offerings for RVs, motorcycles, boats, and ATVs.
You don’t need me to tell you this — credit unions have lived and breathed the very real need to instantly adapt into providing a digital-first experience through the past 15+ months and that is here to stay if you want your organization to be resilient enough to outlast this pandemic and whatever comes next.
- Credit union implication #5: Speed up your digital transition to online auto loans. Develop loan origination systems that are streamlined and online from start to finish. If your credit union does not have internal capacity, move your transition along with support from trusted system providers.
Putting your members first and centering their needs at the heart of your strategy will always send you down a successful path when creating new strategies. Find ways to make it a win-win for your business and the member.
- Credit union implication #6: Adopt member-friendly non-interest income that builds upon traditional auto loan offerings such as auto insurance, Guaranteed Asset Protection (GAP), and Mechanical Repair Coverage (MRC). Other offerings include auto insurance for leased cars and drivers working for ride-hailing firms. Partner with trusted system providers to offer these services if your credit union does not have the internal capacity.
Despite the short-term disruption of COVID-19, we expect auto loans to remain a significant component of credit union loan portfolios over the medium term and for the foreseeable future. Credit unions should use these implications and trends to prepare for a future where auto loans and related services truly advance member well-being, improve members’ transportation options, attract new members, and form lasting, meaningful member relationships — all while diversifying loan portfolios.