Making A Safe Bet

At the start of the pandemic, the consumer savings rate skyrocketed to 33.6 percent in April. In fact, a MagnifyMoney report revealed the 160.5 percent month-over-month increase in savings in the first half of the year indicated that consumers used unemployment benefits and economic impact payments to supplement their savings accounts after the pandemic erupted and unemployment soared to record levels.

The second half of the year reflects a different situation.  According to the report, the personal savings rate dropped to 14.1 percent in August., and 31 percent of American households report that they or someone in their family has used all or most of their savings during the coronavirus crisis.

Going into 2021, how can lenders reassure their auto-buying customers that they are making a safe bet? Maximize the perceived value of the vehicle with the right protection products, designed to keep more of those valuable dollars in their pocket.

Good value for the dollar

If you are a credit union, you are probably already competing on rate. While no one expects a lending institution to match the zero-percent interest rates offered by the automotive OEMs, a quick search of interest rates offered in November showed a very nice 1.39 percent on a 36-month new car loan offered through credit unions, as compared to the November average 4.24 percent interest rate from a bank for the same loan terms. While these low interest rates mean money stays in the member’s pocket, we also know that everyone is competing on rate.

A more strategic approach to market differentiation involves ensuring that a member’s vehicle stays on the road and performs the tasks for which it was purchased. A 2020 Bankrate survey found that 61 percent of Americans could not manage a $1,000 emergency expense. Those who could handle the expense said they would rely on savings or a credit card to cover the cost. But if savings accounts are dwindling and the average credit card APR is 17.30 percent, an unexpected car repair instantly becomes much more expensive, potentially hindering a member’s ability to make their auto loan payments.

Rather than continuing to compete on rate, those lenders positioned to succeed in 2021 are utilizing consumer protection products like a vehicle service contract or vehicle return protection to build more value into their auto loan offering, aside from simply a low rate.

Products like these can potentially enable members to stay current on their auto loan payment when unforeseen circumstances occur, such as a vehicle breakdown or involuntary unemployment. This makes it possible for lenders to increase control and recoup more potential losses. Additionally, by pairing the benefits of complimentary consumer protection products with a well-executed rate structure, credit unions set their institutions up for materially reducing the risk of default while at the same time, adding value to the loan for their members.

In these uncertain times, many consumers are understandably nervous about purchasing a vehicle. And as a lender, you might be a bit nervous lending to customers facing some challenges. But making a deal on a vehicle with added protection is a safer bet for all around.

With more than 40 years of experience in developing market-differentiating consumer protection products to weather any economy, EFG Companies knows how to expand your market share while protecting your loan portfolio. Contact us to find out how today.

Business Growth

New Horizons Ahead in the Used Car Market

Have you paid attention to the used-car market this year? Previously viewed as less desirable by some lenders, used cars are gaining some cachet. Unfortunately, credit unions appear to be missing the boat. According to the recently issued Experian State of the Automotive Finance Market Report for the second quarter of 2020, market share for credit unions in used car financing has declined precipitously since the same time last year. Experian’s report posted a 3.9 percent market share decline to 24.9 percent.

Why the decline? Several factors are likely at play. The market for used cars has grown exponentially. In June, franchised car dealers sold 1.2 million used cars and trucks, according to Edmunds, up 22 percent from 2019. It was the highest monthly total since at least 2007. Credit unions have lower market share with franchised dealers and so are missing the bulk of this sales volume.

New unit inventory issues are also creating a perceived demand for older cars, fed by a roughly two-month halt in production of new cars earlier in 2020. In the first seven months of the year, automakers produced 6.6 million cars and light trucks in North America – three million fewer than in 2019, according to Automotive News. Additionally, consumers are keeping their vehicles for up to 12 years and receiving a tidy sum if they choose to sell, slowing the revolving door of used car inventory.


Waiting for the Other Shoe to Fall

As credit unions contemplate the end of 2020, it’s no surprise there is some consternation. The U.S. added 1.4 million jobs in August as employers brought back workers and the unemployment rate fell to 8.4 percent. But for those employees without jobs, the lack of government stimulus has raised the specter of missing payments and potential eviction. Consumer confidence continued to slide, reflected in the Conference Board Consumer Confidence Index®.  The Present Situation Index, based on consumers’ assessment of current business and labor market conditions, decreased sharply from 95.9 to 84.2. The Expectations Index, based on consumers’ short-term outlook for income, business, and labor market conditions, declined from 88.9 in July to 85.2 this month.

On the financial side of the equation, the Federal Deposit Insurance Corporation released its quarterly report recently, showing in stark detail how the pandemic is ensnaring banks big and small. Profit margins hit an all-time low as institutions stashed away reserves to deal with potential future loan trouble. Conversely, fee income hit a record high, as consumers also stashed away cash. The report signaled that financial institutions anticipate a longer, deeper recession than the original forecast. While government stimulus offered a temporary reprieve, it likely just delayed the pain. Many lenders are bracing for a wave of defaults. With the Federal Reserve expected to keep interest rates low for the foreseeable future, lenders will need to increase fees or find other ways to replace some of that income.

Auto Loan Money to be Made

But there were a couple of glimmers of hope as we closed out the summer months. Used-vehicle lending remained a bright spot for credit unions as used-car values continued to climb. While credit unions struggle to compete for new-car consumers with automotive lenders who offer zero percent interest and seven-year notes on new vehicles, credit unions continue to remain in the fight for used-vehicle auto loan volume.