Business Growth

Mid-Year Auto Lending Review Shows Promise and Opportunity

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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.

Just like in any uncertain time, the balance between increasing auto loan volume and protecting against future risk becomes razor thin. In Experian’s Q1 State of Auto Financing report, the average amount financed increased 4.6 percent year-over-year, with an average monthly loan payment of $577 for an average 69-month term, and at an average LTV (loan-to-value) of 110 percent. With larger LTVs, longer terms and larger monthly payments, the risk of default or delinquency goes up. So, what can credit unions do to keep their auto loan market share without taking on too much risk?

The answer lies in thinking outside of the traditional lending box.

Market-savvy lenders are now contemplating the benefits of offering complementary consumer protection products on their loans. Offering products like limited powertrain protection or vehicle return as part of the loan gives credit unions significant value propositions to differentiate their auto loan offering. Additionally, by protecting members, credit unions are also protecting their portfolio from default or delinquency. Lastly, these complimentary protection products help build the value for other protection product offerings, increasing the revenue brought in by each auto loan.

With more than 40 years of consumer protection product insights, EFG Companies works side-by-side with credit unions like you to administer the right mix of consumer protection products to increase auto loan volume and revenue. Contact us today to find out how.