Economic Indicators Aid Forecasting

As we move through the second half of 2021, there are some economic indicators which should be considered when developing strategies for an auto lending portfolio in 2022.

According to Bankrate data as of June 30, 2021, the U.S. average rate for a 60-month new auto loan started the year at 4.24 percent and has dropped to 4.18 percent.  Similarly, rates on a 36-month used vehicle loan began at 4.53 percent and declined to 4.49 percent. The Federal Reserve has also signaled that it intends to keep interest rates low for the remainder of 2021 – and possibly into 2022.

Unemployment and growing debt are also important economic indicators to watch. According to Experian, the average annual percentage rates (APRs) on used and new car loans were 21.07 percent and 14.66 percent, respectively, for individuals with credit scores between 300 and 500. That compares with used and new car loan APRs of 3.71 percent and 2.41 percent, respectively, for those with top-tier scores between 781 and 850.

Business Growth

Mid-Year Auto Lending Review Shows Promise and Opportunity

Financial institutions reporting their mid-year results revealed some areas of promise for a positive year, as well as some areas for improvement.  Auto loan originations and balances were up at several banks, reflecting a rise in car purchases post-pandemic shutdown. Ally, Chase and Wells Fargo originated $58.1 billion in auto loans in the second quarter, up 23.1% from 2020’s second quarter and up 8.3% from the first quarter. Auto balances at Bank of America, Chase and Wells Fargo were $165.8 billion as of June 30, up 5.2% from a year earlier and 1.7% from March 31.

Among credit unions, CUNA estimated that total car loans stood at $392.8 billion on May 30, up 3.9% from a year earlier and up 1.4% from March 31. While this level of performance is likely on the high end, it does indicate strength in the auto finance market.  

Plan for the best, prepare for the worst

The positive gains experienced by credit unions in the auto loan space may well continue through the remainder of the year, as the economy continues to expand and people return to work. Consumer balance sheets remain healthy due to increased savings, low interest rates and government stimulus money, increasing their ability to borrow and pay for a vehicle. But prices for both new and used vehicles have risen exponentially and inventories remain tight. Outbreaks in COVID-19 coupled with the decline in consumer sentiment could prove a mixed bag for credit unions.

Business Growth

On Auto Loan Volume – Things Are Looking Up

Credit unions have seen many positive signs in the past couple of months. Interest rates continue to remain at record lows, cash deposits surprisingly have increased, loan delinquencies are down, the unemployment rate is improving, and auto sales are looking strong.  For credit unions looking to increase their auto loan origination portfolio, the forecast for the coming quarters is bright. Let us unpack some of these details and ensure you get the greatest return on investment.

Credit union members added deposits faster than the institutions could lend them, resulting in a 19.1 percent YoY increase and a 12-month record. This influx in cash has prompted institutions to expand their loan criteria to capture a broader range of loan originations.  Consider evaluating your loan approval process to consider those high-value customers who experienced a blip in their employment history, recently graduated from college but have a higher debt-to-income ratio, or thin-file clients who are adding a side gig and need a different type of vehicle. There are many strong indicators which can make these loans profitable and expand a credit union’s market share to new communities and demographics.