Business Growth

The Impact of EVs on Auto Lending

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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.

One particular note for lenders to consider are changes in the EV tax credit in 2023. The Inflation Reduction Act, signed into law by President Joe Biden this summer, renews a tax credit of up to $7,500 for new EVs through 2032 and introduces a credit of up to $4,000 for used EVs. The law also requires final assembly of  the EV in North America, and the vehicle’s battery must meet certain conditions to qualify. While many OEMs are looking for creative work-arounds, these requirements will significantly reduce the number of vehicles that are eligible for the EV tax credit.

When it comes to auto loans, the biggest update for car buyers is that the tax credit will be available at the point of sale in 2024. This change allowing the dealer to collect the credit for the buyer will effectively lower the sticker price – meaning that shoppers who are looking at financing their purchase will need to borrow less money.

Here’s what to know when advising your members who are thinking about using the revamped tax credit to buy an EV.

New EV Tax Credit Rule means interest savings on auto loans

Instead of claiming the EV credit on tax returns, consumers will soon be able to transfer it to a dealership and use it to reduce the price of a vehicle. For buyers who plan to finance their EV purchase, this translates to meaningful interest savings.

Here’s an example: A car buyer taking out a five-year, $40,000 auto loan at a 9 percent interest rate can expect to pay $9,820 in financing charges over the life of the loan. But if you can reduce the sticker price and loan amount by $7,500, the total interest paid would be $7,979. This provides an additional $1,841 in savings.

A smaller loan amount also means lower monthly payments for auto loan borrowers. Using the same figures in the example above, a car buyer could save $155 on monthly payments by claiming the EV tax credit at the point of sale. Couple that with credit union’s traditionally lower interest rates on auto loans, and you have a compelling competitive advantage. But remember, this new way of using the EV tax credit won’t begin until 2024. Savvy lenders should build this into their marketing plans for 2023, so consumers can reserve their vehicle of choice and take possession at the beginning of 2024.

Savings on the front means opportunity on the back

Additionally, lowing the front-end cost of a vehicle by $7,500 leaves more room on the back end for valuable consumer protection products. Even EVs need protection, especially for the most expensive part of the vehicle, the battery. With MAP Electric Vehicle Protection, credit unions can provide their members with exactly what they are looking for – a way to protect their investment and save some green.

Lastly, in today’s highly uncertain economic climate, credit unions can give members a compelling reason to stop shopping around and boost their confidence in making a purchase.

With Vehicle Return protection from EFG, credit union members have the freedom to turn in their cars and walk away from up to $7,500 of negative equity when qualifying life events like disability or involuntary job loss interrupt their ability to pay their auto loan.

Make the most of every opportunity in today’s market with consumer education and valuable protection to boost your bottom line and diversify your revenue streams. As the automotive industry begins its slow pivot to grow its EV inventory, 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.