Car Trouble: Preparing for a Potential Decline in Auto Loans

It’s no secret that auto loans have traditionally taken up a significant portion of credit unions’ portfolios; however, there is a troubling new trend that savvy institutions are noticing. The rise of popular ride shares, like Uber and Lyft, have recently led to a decrease in new car sales. Consumers are keeping their vehicles longer, and those in urban locations are making better use of city transportation, such as buses and subway systems. Additionally, rising interest rates have deterred many consumers from purchasing new cars altogether.

All these factors have contributed to a decline in new auto loans. With the combination of members pursuing fewer loans and the emergence of nontraditional competitors (ride share services like Uber have even started offering car loans to drivers), credit unions must evaluate what this could mean for their institutions.

The good news is, credit unions have always been flexible and focused on serving their members, so they can adapt. Credit unions have the opportunity to make adjustments and formulate strategic plans now that will strongly position them to compete and succeed in the coming five or even 10 years.

Doubling Down on Data

Institutions across the country are determining how to best make up for what could potentially be a damaging hit to their portfolios if this decline in auto loans persists. Shawn Hanson, president/CEO of Marine Credit Union, commented, “Credit unions have to look at new areas of lending outside of auto. Commercial is one, but you’re competing with giants and with fintechs like Square, which have access to better data on the revenue streams of businesses than we do. The bigger opportunity is identifying what else our members need in our communities that others aren’t going to be able to provide.”

One of the most critical advantages credit unions have is member loyalty and trust; credit unions have proven that their number one priority is providing superior service to members. However, as the way institutions interact with members becomes increasingly digital, credit unions must find new and more intelligent ways to know their members and anticipate their needs. Data that used to be collected by having conversations across the teller counter must now be mined digitally, at least partially.

Martin Carter, president/CEO of Astera Credit Union, agreed that collecting and organizing better data and more strategically leveraging the information will play a critical role in planning for the future. He explained, “I’m a little skeptical of the forecasts that auto loans will decline as significantly as some are predicting, but we are seeing more instances of families purchasing one car instead of two. This is still a notable shift we must plan for. At Astera, we’re investing in sophisticated analytics technology to ensure we really understand our members and are contacting them at the right time with relevant offers and financial advice.”

Carter continued, “With the wealth of financial and credit information at our disposal, we have more data about our members than Amazon does. The goal is to successfully conduct individual marketing. For example, if members of your credit union are looking at cars, you should be reaching out to them with competitive offers and maybe even preapprovals. Credit unions should use geofencing to determine where the member might be in the buying process. Leveraging data in this way will allow credit unions to compete, even if auto loans do continue to decline.”

Harnessing the Power of Efficiency

Credit unions must also find ways to make processes more efficient. Digitizing loan applications and streamlining loan processing can make loans – whether they be auto, small business or commercial – more profitable. As auto loans decline and credit unions look to diversify their portfolios, centralizing and automating traditionally manual, cumbersome and paper-heavy tasks will be extremely beneficial, not only from an efficiency standpoint but from a competitive perspective as well.

Enhancing the application and approval process can make the credit union a more attractive lender for potential borrowers. Alternative lenders are often successful because their interactions are quick and easy, so credit unions must follow suit. And with even more digitally savvy consumer-facing tech companies like Uber and Lyft entering the scene, credit unions must reengineer these processes quickly to protect their lending market share.

Preparing for Downturns

A decline in auto loans may not be the only economic activity credit unions should keep an eye on; economists are forecasting the beginning of the next recession in 2020 or 2021. Even though no one can precisely predict when a recession will occur or what it will look like, this is something credit unions can factor into their strategic plans for the coming years and months.

Leaders at Marine believe you should take advantage of the good times to better prepare for the bad. Hanson explained, “Now is the time to be building reserves for a potential recession so you don’t have to stop providing value to your members because of market whims. Be consistent and steady in what you’re doing. Credit unions should also start talking about downturns now, because business cycles are inevitable. It’s imperative to educate credit union leadership and boards so they can be actively involved in discussions and preparations. We can’t tell exactly when a recession will hit, but we always have to be ready.”

Carter also agreed that credit unions should proactively prepare for a downturn and pointed out the importance of communication with members during a recession. He said, “Downturns are stressful times, not just for institutions, but also for our members. As community supporters and advocates, it’s important that credit unions reach out to members and let them know we’re here for them if they have financial duress. This will be another example of when good data and knowing your member will prove useful.”

Times are certainly changing – between auto loans trending down, competition heating up, the whisper of an upcoming recession, heightening member expectations and new technologies, the current financial services landscape can seem a bit uncertain. However, forward-looking credit unions are creating strategic plans and forming beneficial partnerships that will allow for thoughtful, efficient service to members. Even if auto loans decline, by diversifying portfolios, increasing efficiencies, investing in data, and continuing to prioritize member and community service, credit unions will be well-positioned to strengthen member relationships and thrive in any borrowing and economic climate.

Larry Nichols is CEO of MDT. He can be reached at lnichols@mdtmi.com.