Credit unions have an extra reason to celebrate over the holiday and new year season. According to the third quarter State of Automotive Finance Market Report from Experian, credit unions now account for the majority of the auto loan market share. Whether they keep these gains in 2023 is yet to be seen. While Federal Reserve prime rate increases do not directly translate to increases in auto loan rates, there are some notable ripple effects that auto lenders are watching. Fluctuations in new and used car prices, higher down payments, longer loan terms, increased defaults, and loan-to-value ratios will all factor into the mix next year. We look forward to collaborating with our credit union lending partners and keeping the scales on an even keel.
GAP for some
Keeping a close eye on the loan-to-value ratio on every deal will be key for lenders in 2023. We encourage our lending partners to offer GAP on those deals with lower down payments and a higher risk of default if the vehicle is deemed undriveable and insurance coverage does not cover the replacement value. For some customers, having GAP coverage in addition to a vehicle service contract can mean the difference between a major tip of the scale or a manageable event.
Reaching the limit
Higher monthly payments and longer payment terms are becoming more common place as the price of both new and used vehicles continue to rise. While some buyers might focus only on the short term, auto lenders who look across their total portfolio might see signs of caution. Even credit union members who are considered prime can run into difficulty in uncertain economic times. Debt protection products such as WALKAWAY® can provide some counterweights to keep the scale in balance and protect positive revenue in 2023.
Over the past few years, car buyers gravitated towards the vehicle they ‘wanted’, focusing on the features and benefits of the latest models. In 2022, we began to see a shift from “want” buyers to “need” buyers as inflation reared its ugly head. With a recession looming and inflation rising, car buyers in 2023 are likely to continue to scale back those aspirations and focus on the features they ‘need’ because it’s likely their current vehicle is on its last leg. This transition from ‘want buyers’ to ‘need buyers’ involves a different sales mindset, which lenders need to be prepared to address.
Create consumer confidence
Car buyers in 2023 will have a lot on their minds. Concerns about the economy, job security, and rising prices will all play a role in their buying decision. Are they getting the most value for their money? Do the payments fit their budget? Is the vehicle reliable? These need-based buyers will look for the lowest total price but are also more likely to see the value of consumer protection products on their overall budget. These consumers have most likely dealt with the significant cost of repairing a vehicle and can easily understand adding $50 to their monthly loan payment to save hundreds of dollars – if not thousands – in the long run. The key to winning these shoppers is education.
Providing that education online is an essential component of the lending process, as consumers initiate their buying process digitally. Spell out the specific issues that can occur, the average cost of those repairs, and the value the correct protection product can provide. From major mechanical protection, to total loss refund, building a quote into the total loan package is the best way to support an educated, confident credit union member.
At EFG Companies, we understand the different needs of institutions working directly with customers or members. We work with you to develop custom product bundling and strategies to enable you to achieve your progressive growth goals by making you more effective with your target audience. As you manage the tipping point in 2023, we have the right portfolio of products to grow your auto loan portfolio.