Credit Union Auto Lending Revs Up

Credit unions have been gaining auto lending market share for a few years, and 2017 not only continued this trend but proved to be an especially good year.

Credit unions’ market strength is reinforced by the 11.3% year-over-year auto loan growth they experienced in 2017, which expanded their market share in both new and used car loans. As a matter of fact, Callahan & Associates reported that Q4 2017 marked 18 consecutive quarters of double-digit growth for credit unions in auto lending. Auto loans in the credit union portfolio reached $335.9 billion in the fourth quarter.

Credit Union Auto Loan Growth in Q1

Auto lending continues to be a strong driver of growth and revenue for credit unions early in 2018. CUNA Mutual predicted 9.5% overall loan growth in 2018, with auto loans leading the way. First quarter auto lending data shows that credit unions are not only on pace to meet 2018 forecasts, they’re shifting into high gear.

We’ve seen growth among our credit union partners. Compared to Q1 2017, loan application volume through the CUDL platform increased 15.3% during Q1 2018. New car loan applications were up 9.5%, while used car loan apps increased 17.7%.

In a testament to credit union market strength, our credit union partners, as an aggregate, remain the largest lender in the automotive marketplace. Credit union auto loans funded through the CUDL platform increased 11.9% during the first quarter, for a total of 371,170 loans. Used auto loans again led the way with a 14.6% increase over Q1 2017, while new auto loans gained 6.2%. According to AutoCount, only four of the top 10 lenders have experienced growth year-over-year through February, while Capital One, Wells Fargo, Bank of America and some manufacturer financing companies registered declines.

That’s good news for credit unions. Further, these increases come despite projections that Americans would buy fewer new cars in 2018. The post-recession boost in new car sales has leveled off, with analysts predicting a 2.3% reduction in 2018 new car sales – projecting 16.7 million new units compared to 17.1 million units in 2017.

Keep in mind, however, 16.7 million units is still higher than the numbers were before the economic downturn in 2008, when Americans purchased 16.2 million new cars. So, 16.7 million units is still strong economic activity, thanks to record low unemployment and discretionary income consumers are using to purchase vehicles.

In fact, the economy is so strong, Autodata reported that most automakers saw a surprise increase in March 2018 sales over March 2017; the automotive industry as a whole saw a 6% increase in sales in March.

Expanding the Used Car Market Is Good for CUs

Credit unions can also expect robust used car loan volume, thanks to the increase in used car sales. Consumer interest in quality used cars – including older, higher-mileage models – will continue strong through 2018. In addition, the increase of off-lease vehicles will give buyers more choices across more price points than the industry has seen in some time.

Consistently, 70% of credit union auto loan portfolios are used car loans, reflecting their used car finance market strength.

Supporting this, CUNA Mutual reported in March that overall, credit union used auto loan balances rose 1.2% in January, faster than the pace set in 2017. That number is even more impressive on a seasonally-adjusted basis, because January’s used auto loan volume is typically the slowest of the year. Seasonally adjusted, January’s used auto loan balance growth was 14.7% – that marks the credit union industry’s highest numbers since January 1997!

Of course, the Fed is expected to raise rates at least once more, maybe twice more this year, which will influence sales. However, higher rates also mean more interest income for lenders.

Keys to Continued Auto Loan Growth

How can credit unions keep their first quarter momentum going and make 2018 another strong auto lending year? Here are two strategies we recommend.

1. Strengthen dealer relationships.

Credit unions gained market share when banks and finance companies pulled back on lending activity due to delinquencies and charge-offs. However, they’re re-entering the auto loan market, spawning increased loan competition in 2018.

Credit unions must leverage technology to continuously improve the efficiency and consistency of their loan decisioning, processing and funding. Every dealer wants to hear that you’re going to consistently underwrite loans and make that process as quick as possible.

CUDL rolled out a new platform last year that is faster and further simplifies the loan approval process for dealers, so participating credit unions are well-positioned to take on banks and finance companies, provided they reach out to dealers and ask for the business.

2. Focus on used car financing.

Dealers are reporting an influx of used car inventory on their lots; most of these are returned lease vehicles. Last year’s natural disasters have also added inventory to dealer lots. Credit unions can assist their dealer partners and grow loans by offering great deals on used car financing. However, credit unions may need to loosen their underwriting to accommodate these buyers. Our data reveals an uptick in average FICO scores so far this year. The average indirect FICO score through the CUDL system was 725 during Q1 2018, compared to 718 last year. Average direct FICO scores were up five basis points.

Part of that FICO score increase is due to the strong economy and consumers continuing to rehabilitate their credit scores after the recession. While that means more prime borrowers to cherry pick, credit unions can’t forget that B paper and below provides some great revenue potential when risk is properly managed.

And if your credit union is trying to attract young members, you may have to ease underwriting to accommodate them.

Auto lending is one of the cores of what credit unions do, and they continue to have a strong marketplace presence and expand their auto loan portfolios.

As a result, credit unions are seizing the opportunity in auto lending, and we don’t anticipate that tapering off. When it comes to auto lending, credit unions are the only finance sector that has exhibited continued growth and grown portfolios over the last couple of years, and they are well-positioned to continue their success in 2018.

Bob Child is COO for CU Direct. He can be reached at press@cudirect.com.