Business Growth Economy

Mid-Year Economics Impact on Auto Lending

2023 has provided some surprises so far for retail auto lending. While many predicted we would be in the midst of a recession, other factors have proven the economy to be more resilient for the first half of the year. For credit unions, there are some definite upsides, but a prudent approach keeps a close eye on the data for the remainder of the year.

Interest rates remain a concern

While the Federal Reserve paused its corrective rate hikes in June, rising interest rates continue to keep some consumers out of the market. According to Experian’s State of the Automotive Finance Market Report: Q1 2023, the average interest rate for a new vehicle increased to 6.58 percent, from 4.10 percent in 2022. The average interest rate for a used vehicle jumped from 8.67 percent in the first quarter of 2022 to 11.17 percent in Q1 2023. While Chairman Powell has signaled that the Federal Reserve will continue to use rate hikes to address inflation, it remains to be seen whether auto lending rates will continue their upward trajectory. If they do, then consumers may keep their vehicles longer or seek other options to meet their transportation needs.

Inflation eases, consumer confidence rises

According to U.S. Labor Department, the annual inflation rate declined from 6.4 percent in January to 4.0 percent in May. The U.S. Consumer Confidence Index also improved substantially in June, soaring to 109.7, its highest level since January 2022. It would appear that the economy and consumer sentiments are on the upswing – unless you are in the market for a used vehicle. While the Consumer Price Index for All Urban Consumers (CPI-U) across all retail markets rose by only 0.1 percent in May, when you break out the CPI for just used cars, it tells a different story, marking a steep increase of 4.4 percent.

Business Growth

Pre-Qualification Boosts Car Loans

Earlier this year, used-car retailer CarMax launched a pre-qualification capability that reveals personalized financing terms, including the monthly payment and APR. This new online financing tool empowers customers to shop vehicles nationwide, with no impact to their credit score. Filters such as down payment, length of loan, and monthly payment can be adjusted, showing only those vehicles that meet their budget parameters. According to company executives, budget continues to be top of mind for consumers in the current economic environment of inflation and rising interest rates. CarMax intimated that conversion rates were very high for buyers utilizing the pre-qualification tool.

While online loan applications are nothing new, a pre-qualification tool that provides monthly payment options and APR without affecting the shopper’s credit score could be very valuable for your credit union. The bigger step is reaching customers and informing them about your tools before they start shopping for vehicles. Savvy CarMax leaders took a page from the marketing best practices playbook, with a press release, social media ads, and search optimization ads. End result? Increased loan volume, increased used car sales, and a bevy of data on consumer financial health to guide future pricing and loan rates.

Your credit union might already offer a quality pre-qualification tool, but how are you getting the message out?

Business Growth

How’s Your Online Platform?

Did you feel a bit of a shift in auto lending recently? Two data points have emerged that have the potential to change the landscape of auto financing for credit unions. First, the Experian Q4 2022 Auto Finance Market Report revealed that credit unions now capture nearly 25 percent of new loans and experienced the highest growth within the auto lending market at the end of last year. Melinda Zabritski, Experian’s senior director of automotive financing and author of the report also stated that larger vehicles like SUVs comprised more than 60 percent of new vehicle financing, with no signs of slowing down, prompting average monthly payments continue to reach new highs.

The second data point involves how those consumers are purchasing their vehicles. McKinsey recently issued a report entitled Disruption and Innovation in US Auto Financing highlighting that auto financing is no longer a separate silo in the car buying process. Researching, buying, financing and delivery are now one experience.  It must be easy on the customer and it’s likely highly reliant on digital.

These two data points should prompt you to take a close look at your credit union’s online platform. Maybe it’s time to implement a “mystery shop” on your website’s auto lending experience. Go through the process of researching an auto loan, estimating payment, submitting an application, and reaching out to your team through the website. If you have a chat feature, try it out for yourself and check your customer relationship management (CRM) tool to see what actually happens with that inquiry. Taking an unbiased view of the member’s experience can give you actionable insights that turn into revenue.