Economic Indicators Aid Forecasting

As we move through the second half of 2021, there are some economic indicators which should be considered when developing strategies for an auto lending portfolio in 2022.

According to Bankrate data as of June 30, 2021, the U.S. average rate for a 60-month new auto loan started the year at 4.24 percent and has dropped to 4.18 percent.  Similarly, rates on a 36-month used vehicle loan began at 4.53 percent and declined to 4.49 percent. The Federal Reserve has also signaled that it intends to keep interest rates low for the remainder of 2021 – and possibly into 2022.

Unemployment and growing debt are also important economic indicators to watch. According to Experian, the average annual percentage rates (APRs) on used and new car loans were 21.07 percent and 14.66 percent, respectively, for individuals with credit scores between 300 and 500. That compares with used and new car loan APRs of 3.71 percent and 2.41 percent, respectively, for those with top-tier scores between 781 and 850.

Business Growth

The Early Bird Tactic to Growing Your Auto Loan Volume

According to the FDIC, cash is readily at hand as a record $2 trillion in cash hit the deposit accounts of U.S. banks since the beginning of the pandemic. With interest rates near zero, net interest margins have narrowed. Financial institutions would love to issue loans, but there are few opportunities to grow right now. Auto loans are a frequent go-to solution, but the pandemic has added a few wrinkles to that tried-and-true tactic.

Used car values typically decline during a recession, raising concerns about negative net equity on typically long-term 84-month loans. But analysis from Edmunds reflects there could be more demand for used vehicles versus new, as the cost of new units continue to rise and manufacturers continue to fall behind on production schedules.  

How can a credit union capitalize on the opportunity to grow their auto loan portfolio? The first step is to reach the car shopper early in their search. By the time a consumer visits a dealership, they are likely to have conducted an average of 13-14 hours of research. Offer proactive, pre-approved loans to members along with assistance in selecting the best deal for their credit position. Partner with members in their buying journey rather than waiting for them to come to you.

Business Growth

New Horizons Ahead in the Used Car Market

Have you paid attention to the used-car market this year? Previously viewed as less desirable by some lenders, used cars are gaining some cachet. Unfortunately, credit unions appear to be missing the boat. According to the recently issued Experian State of the Automotive Finance Market Report for the second quarter of 2020, market share for credit unions in used car financing has declined precipitously since the same time last year. Experian’s report posted a 3.9 percent market share decline to 24.9 percent.

Why the decline? Several factors are likely at play. The market for used cars has grown exponentially. In June, franchised car dealers sold 1.2 million used cars and trucks, according to Edmunds, up 22 percent from 2019. It was the highest monthly total since at least 2007. Credit unions have lower market share with franchised dealers and so are missing the bulk of this sales volume.

New unit inventory issues are also creating a perceived demand for older cars, fed by a roughly two-month halt in production of new cars earlier in 2020. In the first seven months of the year, automakers produced 6.6 million cars and light trucks in North America – three million fewer than in 2019, according to Automotive News. Additionally, consumers are keeping their vehicles for up to 12 years and receiving a tidy sum if they choose to sell, slowing the revolving door of used car inventory.