Brien Joyce
Vice President
EFG Companies
The economy has been heavily featured in the news lately, with some pundits ringing the recession bell and others pointing to low unemployment and consumer confidence. Whichever way your divining rod is pointing, the fact remains that these economic indicators prompt savvy credit union lenders to be on alert.
From a retail automotive standpoint, first quarter numbers are validating the forecasted plateau/slight downturn in both new and used sales. According to the first quarter Experian statistics, new vehicle registrations were down 100,000 as compared to Q1 2018. Used vehicle registration took a steeper dive, dropping by 300,000 versus the same time frame.
As context, quarterly auto loan balances reached a record high in Q1 2019, jumping 6.5% year over year. The average new loan also hit a record high, surpassing $32,000, reflective of the continued high cost of vehicles and lack of OEM incentives. The monthly payment amount on those loans also hit a record, passing the $550 mark across all loan types. The interest rate on all risk categories averaged over 6%. Credit may be cheap at the Federal Reserve lending window, but it is holding firm against pressure at the auto loan desk.
A few anomalies also appeared in Experian’s first quarter data. Surprisingly, new auto loan terms decreased while used terms increased in Q1 2019. It is likely that even with low unemployment in many areas of the country, job security and available discretionary income remains low. While longer term loans continued to dominate the market, new loans with shorter terms experienced growth. This factor may be attributed to a generational demographic. Millennials and GenZ tend to be debt averse, having experienced the fallout from the Great Recession first hand. As these consumers gain a credit history, they could become an interesting short term/low payment niche market if the data continues to follow the trend.
While growth is king, risk is a dangerous mistress in this economy. Now more than ever, lenders are struggling to balance growth versus risk outside of APR and loan terms. More credit unions are turning to out-of-the-box solutions, including the use of complimentary consumer protection products such as vehicle return protection, and limited powertrain protection.
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 the loan for both consumers and dealerships.
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.