"Actually, the data shows that in the last few years the percentage of loans that are upside down has been going down. In the last year, though, it has been going up, but it's still below the levels of four years ago."

Power figures show the percentage of negative equity at 36.98% in 2004. It dropped to 28.03% in 2007, then rose to 29.06% in the period Jan. 1 to April 13, 2008.

"The percentage of negative equity trades was the highest it has been for many years," Libby indicated. "I think what happens is finance sources simply adapt and adjust when they reach a certain threshold they don't want to go over. That's what happened several years ago, and the percent of upside down trades came down.

Looking ahead, "As these loans get longer and longer, and the vehicle owner with a very long loan is motivated to come back to the dealership and he has not paid off his prior loan and is upside down, he will take out an even longer loan. Certain lenders may reduce their approval rates. The market will self-adjust."

Although Power does not track loan delinquency rates, Libby has heard anecdotal reports and seen newspaper accounts indicating more people are falling behind in their auto loan payments. Given the current struggles in the economy, he isn't surprised.

Jesse Toprak, senior industry analyst at Edmunds.com, sees several forces at work affecting the percentage and amount of upside down loans: used car values, with low values often translating into negative equity, and loan terms, with the average payback period climbing from 64 months to 6 years.

"Unfortunately, a lot of consumers are shopping based on a monthly payment range," Toprak noted. "Of course, that's probably one of the worst ways to shop because if you go to a dealership and you tell the dealer you want to pay say $400 a month, they will find a way to get there, perhaps a seven-year loan or a five-year lease. That's not best for your bottom line even if it accomplishes the goal of getting the payment you want."

At the same time, the terms of auto loans are lengthening, car sales are slumping. The overall volume of new vehicle sales in 2008 is projected to be the lowest since 1998, some 15.5 million units.

"Less vehicles sold means fewer loans generated–there's a direct correlation there," Toprak said. "The used car market picks up the slack a little bit, but not completely. So we are seeing credit unions becoming more aggressive, particularly in working with their good members. They are using credit scores to be more generous and more creative."

In fact, Callahan's First Look data shows credit union auto loans at $26.24 billion for the first quarter of 2008 compared to $25.76 billion for the same period in 2007.

Toprak noted the emergence of variable-rate auto loans priced much lower than fixed rates, as low as 4.5% compared to 7%. The variable may be indexed to something like T-bill rates, and could rise or fall, but unlike troublesome variable-rate mortgages, car prices haven't been as volatile as home prices. Except for enthusiasts investing in collector cars, people don't see their vehicles as assets that will grow in value.

Toprak suggested credit unions need to build better relationships with auto dealers, stage events such as tent sales at the credit union and ratchet up their presence on Web lending sites.

"I think credit unions actually have an opportunity to grab some business in this environment," Toprak said.

Educators Credit Union, Racine, Wisc., has seen the length of auto loans increase but on a small scale, according to Senior Vice President James Henderson. While some financial institutions write auto loans for up to seven years, ECU tries to keep loans to three to five years on used vehicles but does offer a six-year option on new cars and trucks. Henderson estimated perhaps 10% are for six years.

He noted the credit union finances up to 100% value, which does hike the upside-down factor, although members can take out GAP insurance to protect them in case of an accident.

As for the impact of the economy on auto sales and loan demand, Henderson said ECU has held up rather well.

"Our growth in car loans has been 5% or 6% the past couple years. We are seeing a fairly high unemployment rate in southeast Wisconsin, and there are tougher times for a lot of members. We've tried to incorporate a few programs to help us continue to grow our loans and be our members first source when they want to finance a car," he indicated.

One program is Fast Lane Financing, a refinancing program to bring into the credit union loans that originated at dealerships or banks. In addition to lower interest, Fast Lane offers $50 to members who refinance.

The staff has been aggressively identifying auto loan opportunities. When a member comes in perhaps for a credit card or home equity loan, and ECU pulls a credit report showing an existing auto loan elsewhere, there may be an opportunity for the member to save money by refinancing. The credit union receives a quarterly report from Experian and other credit bureaus listing members who have auto loans elsewhere.

"In a lot of cases we find if they have a loan elsewhere they don't know what the rate is," Henderson said. "We can actually save 25% to even 50% of our members money if they take out the car loan with us. Our direct mail response rate has been 3% to 5%."

In 2002 ECU received a license to sell used vehicles. In 2007 the operation sold 714 vehicles. That activity recently made headlines when the Wisconsin Automobile and Truck Dealers Association protested to the state Office of Credit Unions. Officials ordered the credit union to stop selling used vehicles, but stayed the order pending appeal.

"We think it's pretty promising we'll come out on the positive side," Henderson said. "The other option, if we can't do it ourselves, is to use a third party. It's possible we could use the same staff and sell that portion of the business."

–[email protected]