Business Growth

Hedging a Seven-Year Auto Lending Bet

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According to credit bureau Experian, 19 percent of new-vehicle debt and 11 percent of used-vehicle loan terms were 84 months in 3Q 2022. By comparison, Experian data revealed that only 11 percent of new-vehicle borrowers and 4.1 percent of used-vehicle borrowers in 3Q 2018 were on the hook for an 84-month auto loan. That’s seven years of debt on a vehicle that begins to depreciate the minute it’s driven off the lot. Outside of lending terms, how is your credit union hedging its bets in the automotive lending space?

Rising vehicle costs, rising inflationary interest rates and continued concerns about the economy have prompted buyers toward lower monthly payments and longer-term loans. Lenders are also willing to offer pre-approved rates at upwards of 96-months on the strength of interest-derived revenue and low delinquency rates. But, how long can that last?

The state of auto lending is not a one-dimensional picture. Let’s look at some details to get a better view of the rewards – and risks – of long-term auto loans.

Consumer auto debt is rising

According to the Federal Reserve Bank of New York, Americans owe $1.52 trillion in auto loan debt. Overall vehicle debt nearly doubled between the third quarter of 2012 ($768 billion) and the third quarter of 2022 ($1.52 trillion). While mortgages still consume the bulk of American consumer debt at 70.7 percent, auto loans account for 9.2 percent, just below student loan debt at 9.5 percent.

Auto lending is a safe bet for creditors

New car buyers in the nonprime/fair credit tier (601 to 660) take out the largest loans — $44,530, on average according to Experian. Borrowers with credit scores in the prime category (661 to 780) — take out the most for used cars at $30,222. In the first three quarters of 2022, borrowers with credit scores of at least 720 took out $274.6 billion in auto loan debt. Fortunately, auto loan delinquency rates continue to drop. According to the New York Federal Reserve, 3.9 percent of outstanding auto debt is at least 90 days late — down from 5.3 percent in 2010 — while another 6.2 percent are 30 days overdue. That’s a decrease from 10.9 percent during the height of the Great Recession.

Average payment trending higher than car price

Based on 3Q 2022 data from Experian, the average monthly car payment for a new vehicle was $700 — up 13.3 percent year-over-year. Used cars monthly payments averaged $525, an increase of 11.2 percent. The 13.3 percent hike in the average new car payment is nearly 5 percentage points higher than the new vehicle price increase of 8.4 percent (according to the October 2022 BLS consumer price index). The difference translates to interest payments on longer term loans!

Expanding auto lending revenue opportunities

With the average auto loan term for new vehicles extending to 69.7 months, or nearly six years, according to Experian, the majority of vehicles purchased will be on the road long past their warranties. Attaching vehicle protection products to new and used cars is an excellent means of extending the revenue for each loan, while also protecting your portfolio from the risk of default/delinquency. With many buyers focused on the monthly payment – and not the potential cost of repairs – it’s important for the financial team to engage in those conversations. Lenders – especially credit unions – are in an excellent position to educate their customers on the potential risk of an unprotected vehicle.

The older the car, the more costly the repairs. With an 84-month term, there’s a much higher chance the customer will need to pay for potentially expensive repairs while still making a monthly payment. If budgets are tight and emergency reserves are low, a vehicle repair could break the budget and lead to costly decisions around which bill to pay. Credit union lenders can educate the buyer about the pluses utilizing a vehicle protection policy versus having no safety net at all. 

2023 could prove a very lucrative year for lenders in the retail automotive space. To maximize revenue potential and hedge your bets, consult your EFG team. With more than 45 years of experience, EFG is relied upon by lenders across the U.S. and Puerto Rico to advise and assist with the best portfolio of consumer protection products. We’re not just a provider, we’re a business partner.