It can be challenging to think strategically when each day brings a new challenge, a new directive, a new mandate, or a new situation impacting your business and the community. The second quarter was a tale of two cities for credit unions. April reflected a precipitous drop in most aspects of the automotive and financial markets, thanks to shelter-in-place mandates and the pandemic sweeping across the country. But May and June told a slightly different – and somewhat better – story. Light vehicle sales were only down 24 percent in June as compared to 2019, year over year. While in a normal year, dealers and lenders would decry that number, this year there was a round of huzzahs! That’s just the world we live in these days.
Credit unions started the year on an upward trend for automotive lending. Average loan amounts continue to increase according to the latest Experian State of Auto Finance Report. In the first quarter, new vehicle loan amounts averaged $33,739, and used vehicle loans totaled $20,723 on average. Buyers also increased vehicle payments, with the average new vehicle payment jumping to $569.
After leveling off through much of May and June, financing rates dropped to their lowest level of the year for the week of July 15 to 4.24 percent, a decrease of 0.09 percent from the week prior. Rates held steady for the week of July 22, but were down 0.36 percent since the beginning of the year and down 0.49 percent from 2019 numbers.
How the second half of this year will play out is anyone’s guess. However, there are some indicators – and some opportunities for credit unions to recoup their losses. Manufacturers have been playing a sticky game with low interest rates and deferral advertising – for the super prime customers. With rising vehicle loan and payment amounts, both prime and non-prime consumers are finding out that they don’t qualify for captive lending offers. Additionally, those same manufacturers are beginning to pull back on those incentives for the remainder of the year.
While OEMs return to production and vehicles begin to flow back onto dealer lots, credit unions have an opportunity to increase market share and protect their auto loan portfolio by helping customers across credit tiers.
Credit Unions Managing Growth vs. Risk Today
Your credit union has always actively managed how to grow without taking on too mush risk. However, in today’s economic and automotive climate, that balance is becoming more precarious. Will jobs grow or will we plunge into a deep recession? Will consumers be able to purchase a vehicle and maintain their auto loans?
Consumer protection products offer material protection against the risk of delinquency or default. For example, with vehicle return protection, consumers are protected from the negative financial repercussions of instances like involuntary job loss. This same consumer protection also protects the loan. How? Consumers can either return their vehicle with no impact to their credit or use payment relief to continue to make loan payments if an unforeseen life-changing event occurs. Either way, the lender’s risk and exposure is significantly diminished.
More traditional consumer protection products, like vehicle service contracts, also insulate lenders from risk. Consider, for example, the inevitable event when a consumer making that monthly $569 payment has a vehicle breakdown. It is likely that while they can normally make their monthly loan payment, they will now struggle to pay both the repair bill and their loan. So, they are forced to make a choice: pay for the repair or make their loan payment. They are most likely going to choose the first option, even if that means their credit might take a hit or their vehicle might be repossessed.
Now, if that same consumer had a vehicle service contract on their loan, they could possibly eliminate or at least significantly reduce the cost of their vehicle repairs, allowing them to repair their vehicle and make their monthly loan payment.
By pairing the benefits of consumer protection products with a well-executed rate structure, credit unions can set their institutions up to materially reduce the risk of default while at the same time add value to the loan.
With more than 40 years of experience in innovating agile consumer protection products, EFG Companies knows how to develop the right mix of products and services to mitigate risk while making your loan more attractive. EFG has a proven track record of working with lenders to develop and implement these revenue-generating programs. Contact us today to find out how.