Waiting for the Other Shoe to Fall

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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.

Even with attractive financing terms, the cost of a new vehicle is out of reach for cautious consumers. Whether needing a new car to support a delivery side gig or having a college student attending virtual school at home, more shoppers are turning to used vehicles. But there are inventory issues on used car lots. According to JD Power, consumers are now driving their vehicles for up to 12 years, reducing the flow of low-mileage vehicles available at auction. On the flip side, lease volume is decreasing and rental car companies are off-loading their inventory, putting some vehicles into play.

One clear opportunity for credit unions is to target the ‘non-prime’ auto loan customer. Due to the pandemic, many of these individuals might have missed a few months of employment, impacting their credit rating. However, they may have been called back to work or have replaced the lost income with non-conventional jobs, like food delivery drivers. While they may have been knocked sideways, these consumers are eager to work with a lender who sees their value.

To increase auto loan volume, while at the same time insulating it from risk, many credit unions are looking into vehicle return programs and vehicle service contracts.

Products like these can potentially enable consumers 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 beyond setting a higher APR. By pairing the benefits of complimentary consumer protection products with a well-executed rate structure, lenders set their institutions up for materially reducing the risk of default while at the same time, adding value to their auto loans.

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.