Credit unions have had a positive start to November, with good news on several fronts.
- The Federal Reserve kept interest rates on hold for a second consecutive meeting, taking a cautious stance at a time when rapid inflation is retreating but has not reached the target goal of 2 percent.
- Consumer spending ticked up to 7 percent in September from 4 percent in August, reflecting a relatively positive sentiment.
- The Bureau of Labor Statistics reported that the U.S. economy added 150,000 jobs and the unemployment rate rose a tenth of a percentage point to 3.9 in October, positive news in the eyes of economists.
- It also appears the union strike against the automakers has ended, pending contract ratification.
However, auto lending rates remain sky high with the average auto loan interest rates across all credit profiles ranging from 5.07 percent to 14.18 percent for new cars and 7.09 percent to 21.38 percent for used cars, pricing many would-be buyers out of the market. While total new-light-vehicle sales were up 1.6 percent in October from a year ago, the MSRP of those vehicles remained high and the average incentive spend from manufacturers declined 1.4 percent to $2,322, according to Motor Intelligence data.
Additionally, the Big 3 automakers have signaled that the costs accrued to come to an agreement with the United Auto Workers Union will be passed on to consumers, i.e., higher prices. Wards Intelligence estimates that the roughly 6-week long union strike resulted in 35,000 lost deliveries in October and November sales will continue to see some lingering effects. Used vehicle inventories remain challenging as dealers resist inflated auction prices and consumers continue to hold on to their vehicles. With all of this in flux, credit unions must keep their eye on the target for the remainder of the year.
But, what is their target, or what should the target be? Up until now, most auto lenders’ primary concern for the year has been managing risk and reducing delinquencies – hence the sky-high lending rates. Should that still be the focus or is there a better way to increase auto loan volume while mitigating risk?
Deep breath – and WALKAWAY
As a credit union, you are focused on ending the year with a healthy balance sheet, a loan portfolio full of healthy paper, and a growing list of members who choose to use your financial institution for their auto financing. You can accomplish all these things with some strategic tools that will take some of the stress out of the year end.
An earlier round of layoffs in some sectors followed by a slowing jobs report has some consumers feeling a bit uneasy about their employment status. Offering consumer protection products, such as WALKAWAY Vehicle Return Protection or a Vehicle Service Contract, can give a potential car buyer confidence and give you a distinct advantage over other lending competitors.
With consumer protection products, like a vehicle service contract or vehicle return protection, consumers are protected from the high costs associated with a vehicle breakdown, or from the negative financial repercussions of instances like involuntary job loss. This same consumer protection also protects the loan. How? Consumers can continue to make loan payments if they don’t have to reallocate funds to cover costly mechanical repairs or cover living expenses on an unemployed budget.
Leaning on tried-and-true customer lending values can also differentiate your credit union from other financial options. Credit unions often have more flexibility in setting rates or can create bundling solutions for existing customers that ease higher interest rates. And always, take the opportunity to educate potential buyers on the details involving credit scores, length of loan, and the importance of protection products to avoid costly repairs.
Finally, recognizing that each customer is unique puts your credit union in a position to customize a lending solution that works for all. Whether working with a new buyer that has a thin file, a buyer with a less-than-preferred credit score, or a buyer who wants to pay a large amount of cash up-front, encourage your loan officers to take the time and understand each situation. By matching the right solution with the right dealer and the right vehicle, you can strengthen your portfolio with solid paper that yields revenue.
While each case is unique including F&I products that protect the value of the vehicle and the health of the loan is always a good bet. Work with your team of experts at EFG to increase and protect your auto loan portfolio. We’re not just a provider, we’re a business partner.