According to economists at industry organization America’s Credit Unions, the rates of auto loan delinquencies have reached the highest level in this decade. Credit risk is rising, and economic uncertainty is high. For credit union auto loans, 60-day delinquencies have reached levels not seen since before the pandemic. Let’s look at some of the historical metrics for clues to remedy the situation in the remainder of 2025.
Loans made in 2022 or later are doing worse than older loans. The Federal Reserve had a near-zero interest-rate policy until March of 2022. While the Fed began raising interest rates in Q2 2022, strong consumer demand for vehicles after the pandemic led to record high loan growth rates. As a result, many loans consumers borrowed after 2022 had higher interest rates than pandemic-era loans. While all of this points to increasing credit risk, the good news is payments on many loans are stabilizing around two years.
Another economic factor was the stimulus payments from the federal government during the pandemic. Many consumers, especially ones struggling with debt, used the money to pay down loans. This prompted credit scores to rise during the pandemic. That effect is wearing off. Around half of auto loans in 2022 and 2023 were made to consumers with credit scores of 720 or above. Today, 20 percent of those consumers have dropped below 720.
While delinquencies are declining from their high levels at the beginning of the year, there are many factors that could cause continued credit risks for credit unions. A stalled labor market coupled with growing levels of layoffs could impact a member’s ability to pay their bills.
Declining consumer confidence impacts auto purchases
McKinsey’s quarterly ConsumerWise research asks consumers how they feel about the economy and how those sentiments might influence their spending. Second quarter results found that net sentiment dropped 32 percent in May, a nine-percentage-point decline from the previous quarter. While inflation remains consumers’ top concern, tariffs have quickly risen to second place.
Most consumers surveyed said they either have already changed their spending habits or expect to change them soon. Generationally, Gen Z and millennials were more likely to change their spending habits, while baby boomers appeared more resistant to change. Consumers who said they expect to change their behaviors often cited traditional trade-down actions, including cutting back on spending on nonessential items, purchasing fewer items, or switching to lower-priced brands and products. Specifically noted, Gen Zers who need to purchase an essential item such as a vehicle may find that even used cars may be out of reach for many of them.
Next steps credit unions should take in the 4th quarter
Mounting economic concerns will impact credit unions’ existing and future auto loan portfolios. To prepare for this decline, lending teams should lean into those skills and tools that differentiate them from other lenders.
Credit unions are in a distinct position. They have strong relationships with their members, who often have multiple types of accounts at the institution. Credit unions often offer lower interest rates compared to banks, making auto loans more affordable – especially to Gen Z and other demographics facing financial challenges. They also provide more flexible repayment terms, allowing borrowers to choose what works best for their financial situation.
This personalized approach is also reflected in credit unions’ ability to educate members on the value of F&I products attached to an auto loan. With members taking a cautious approach to spending, buying a new vehicle feels even scarier. Proactively reach out to members who might be thinking about purchasing a vehicle. Discuss potential tax benefits, loan options, and options to improve credit scores for a more favorable rate.
Educate members on the role F&I products play in protecting the value of the vehicle. While manufacturers’ warranties are included with new vehicles, they come with term and mileage limits. As members keep their vehicles long past those milestones, repairs to the powertrain, battery, and other components are costly. Maintenance and protection products ensure members won’t face costly repair bills or ignore importance maintenance.
Attaching F&I repair and protection products to the loan will protect the value of the vehicle, keeping it on the road longer and guarding against unexpected repair bills which can be financially devastating for a member. EFG’s complimentary Drive Forever® Worry Free gives members confidence to purchase the vehicle and comfort that they can drive without worry about repairing the most expensive part of the vehicle – the powertrain – for as long as they own it. The additional back-end revenue makes these products valuable for loan portfolios as well.
Debt protection tools such as WALKAWAY® are great options to safeguard the loan while easing a member’s potential financial concerns. With WALKAWAY protection, members have the freedom to turn in their cars and walk away from negative equity when qualifying life events like disability or involuntary job loss interrupt their ability to pay. Examples include:
- Loss of drivers license
- International employment transfer
- Self-employed personal bankruptcy
- Accidental death
- Mental disability
- Critical illness
- Death due to critical illness
This valuable safeguard helps credit unions:
- Drive new auto loans by equipping prospective members with a backup plan that boosts buyer’s confidence
- Differentiate loan products in a crowded market
- Open up a new stream of revenue by offering upgrade options
- Increase customer satisfaction and drive repeat business
Credit unions who include a complimentary WALKAWAY waiver with their auto loans give members a compelling reason to build a lasting and profitable relationship with your institution. And because WALKAWAY benefits have no impact on the customer’s credit score, credit unions can keep the door open for future loan opportunities with these members while continuing to earn their trust and loyalty.
As economic concerns continue to be top-of-mind for consumers, members who are purchasing a vehicle can benefit from a credit union’s valuable knowledge. Take steps to protect your loan portfolio and support your members during the 4th quarter. At EFG Companies, we’re more than an F&I provider, we’re your trusted business partner in auto lending. Together, let’s all make more in 2025.
Connect with author Brien Joyce on LinkedIn, or contact him directly at bjoyce@efgusa.com or 770-843-4025.