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.
Credit unions continue to show gains
According to Experian’s Q1 report, credit unions continued to gain market share in auto lending, most notably in the used vehicle space. Although loan amounts have begun to decrease slightly, the average monthly payment for a new vehicle increased to $725, up from $650 in 2022. The average monthly payment for used vehicles came in at $516 in Q1 from $505 in Q1 2022.
Auto lending delinquencies are on the rise
Nothing spooks a lender like rising delinquency trends, and the first quarter of this year saw a notable rise in delinquency rates due in large part to increased lay-offs and other economic pressures. Auto loan delinquencies for both 30-day and 60-day rose above pre-COVID levels for the first time, prompting lenders to dust off their risk mitigation tool box. This included removing more sub-prime and non-prime credit scores from their approval algorithms in favor of more prime and super prime credit scores. According to Experian, super prime borrowers now account for 82 percent of auto lending portfolios for new vehicles and 56 percent of their portfolio for used vehicles.
While prime and super prime consumers are a much safer bet when it comes to borrowing, this elimination inevitably reduces the overall pool of consumers who can purchase a vehicle. More lenders are evaluating how to reduce their impact on the buying public while fortifying their portfolios. The answer lies in consumer protection products.
With programs like vehicle return protection from EFG Companies, credit unions have been making their auto loans more attractive to their members while reducing losses on defaults and delinquencies.
Vehicle return protection programs maintain a proactive risk-management strategy that may decrease repossessions and collections costs while enhancing loan volumes and increasing finance control.
For example, the basic level of a vehicle return program offered by EFG covers a consumer’s negative equity up to $7,500 as long as the consumer meets the criteria for the claim and returns their vehicle to the dealership. Covered circumstances include loss of income due to involuntary unemployment, physical disability, loss of driver’s license, international employment transfer, self-employed personal bankruptcy and accidental death.
How does this help you?
Let’s look at the benefits of a single purchase with this valuable protection before looking at the broader picture. Imagine if you will, a loan officer closing a loan with 6 months complimentary vehicle return on a car with the MSRP at $20,000:
- The consumer did not put a down payment on the car, so they are driving off the lot with a $20,000 loan.
- The consumer makes four monthly payments of $500 and subsequently loses their income via one of the covered circumstances. At this point, the loan balance is 18,000.
- The customer returns the car to the dealership, which buys the car back at its current market value, $13,500.
- Then the vehicle return benefit kicks in, paying the credit union the remaining balance of $4,500. The loan never defaults, the consumer’s credit remains intact, and the lender reduces any potential recovery expense.
Fortify your loans and protect your margins by strategically choosing consumer protection products to pair with your loans. Strong finance products not only generate more loan applications and approval, but also may help protect you by reducing risk.
As we look toward the second half of the year, there are many factors at play. Whether the arrows continue to trend upward – or indicators begin to slide – the credit union auto lending team will be well served sticking to the actions that have continued to see portfolios grow. Focus on what the customer needs, ease the path to purchase, and add in consumer protection products to add value to each loan. Remember, your EFG team of experts is here to help you maximize your auto loan portfolio. We’re not just a provider, we’re a business partner.