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Business Growth Economy

Mid-Year Economics Impact on Auto Lending

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.

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Business Growth

The Impact of EVs on Auto Lending

Things are looking pretty rosy for credit unions in the auto lending space. According to the Experian Q4 2022 Auto Finance Market Report, credit unions now capture nearly 25 percent of new loans and experienced the highest growth within the auto lending market. Payments and loan amounts also increased year-over-year in 2022, adding more revenue to credit unions auto loan portfolios. Credit unions remain the best option for many consumers with rates at 5.5 percent versus banks, financing companies and other types of lenders.

In the used car space, credit unions have pulled ahead to become the number one option for financing with greater than 30 percent market share. Terms and rates increased across all types of credit segments while loan amounts and payments also increased. As with new loans, credit unions also offered the lowest rates at roughly 7 percent versus other financing options. But amid all the good news, 60-day delinquencies ticked up to above pre-COVID levels for the first time since 2018. For some segments of the economy, money woes are growing.

Opportunities in EVs on the horizon

 While sales of U.S. passenger vehicles fell in 2022, the number of electric vehicles (EVs) sold rose by a remarkable 65 percent, an increase of almost two thirds compared to 2021. EVs accounted for 5.8 percent of all new cars sold in the US, an increase from 3.1 percent the year prior. Industry projections expect the number of electric vehicles sold in the US will surpass the 1-million mark in 2023. This growth will be driven by OEMs increasing inventory, improved charging infrastructure, and affordability. The average price of an EV sold in the US last year was $61,448, a 5.5 percent decrease compared to 2021.

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Business Growth

Hedging a Seven-Year Auto Lending Bet

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.

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