Credit Unions Continue Automotive Finance Surge

Credit unions continued to grow their overall share of the automotive finance market in Q2 2018, garnering higher growth than all other lender types combined.

Based on findings from Experian’s latest “State of the Automotive Finance Market” report, credit unions saw the highest growth, both in terms of total dollar volume and percentage increase. From Q2 2017 to Q2 2018, credit unions’ open automotive loan balances jumped from $295 billion to $329 billion, a more than 11% increase. The $34 billion increase was more than that of banks ($1 billion), captives ($8 billion) and finance companies ($5 billion) combined.

It’s a trend we’ve seen over the past two years. Credit unions’ open automotive loan balances increased by 27.52%, up from $258 billion in Q2 2016. That’s more than double the growth rate for overall automotive lending over the past two years (10.25%).

But what makes the credit union performance so remarkable is the plausible argument that they’re helping to drive the record growth for the entire automotive lending industry. In Q2 2018, loan balances reached a record high of $1.149 trillion, up from $1.027 trillion in Q2 2016.

In terms of market share for total financing, credit unions rose from 20.3% in Q2 2017 to 21.3% in Q2 2018. While banks and captives both have higher market share for total financing, credit unions are making significant gains. In Q2 2017 banks led credit unions in total share by 12 percentage points, but that lead dwindled to 10.3 percentage points in Q2 2018. Captives’ lead over credit unions fell from 8.3 percentage points to 7.7 percentage points over the same period.

Credit unions made their biggest inroads in the used vehicle segment, jumping from 26.7% in Q2 2017 to 28.8% in Q2 2018. Banks had an 8.5 percentage point lead in Q2 2017, but that fell to 4.9 percentage points in Q2 2018.

Conservative Shift in Auto Lending Industry Plays to CU Strengths

The automotive lending industry shifted away from riskier borrowers during Q2 2018. Total loan balances for the subprime and deep-subprime categories fell from a 19.67% share in Q2 2017 to an 18.81% share in Q2 2018.

In terms of total balance growth, super-prime and prime grew by 6.52% and 6.15%, respectively. Nonprime balances exhibited 3.32% growth, while subprime balances increased by 1.28%. Total balances for deep-subprime contracted by 6.64% as lenders shied away from the most credit-challenged borrowers.

The average credit score for consumers purchasing new vehicles rose one point to 715 (722 for new leases and 711 for new vehicle loans). On the used side, the average credit score rose three points to hit 655 overall.

Conservative Strategy Leads to Low Delinquencies

These shifts toward consumers with better overall credit play well for credit unions, as their members are in lower-risk tiers. One of the outgrowths of this strategy is low borrower delinquency. In Q2 2018, 30-day delinquencies for credit union loans and leases dropped to 1.18% from 1.27% in Q2 2017. This is well below the industry average of 2.11%.

For 60-day delinquencies, credit unions improved from 0.29% to 0.26%. Overall industry delinquencies dropped slightly from 0.67% in Q2 2017 to 0.64% in Q2 2018.

Finance companies, which primarily focus on credit-challenged customers, have 30- and 60-day delinquency rates of 3.67% and 1.32%, respectively. As the market shifted more toward credit union-friendly strategies, finance companies saw their market share drop from 11.6% to 11.1%.

Moving forward, the shift away from riskier credit tiers bodes well for credit unions. But the entire auto finance industry needs to keep a close eye on market trends and the crucially important, data-derived telltale signs of change. If the winds begin to shift, leveraging the power of data can help these financial institutions make better decisions and continue their smooth sailing.

Melinda Zabritski is Senior Director of Automotive Solutions for Experian. She can be reached at 714-830-7734 or melinda.zabritski@experian.com.