The Path Forward for Credit Unions in the Rebounding Auto Industry
With sales rebounding and fewer incentives being offered, now is the time for CUs to recapture market share.
Roughly 10 months ago, the automotive industry came to a screeching halt. Factory shutdowns, inventory shortages and a decline in sales led to a rough patch for many within the industry, including lenders. But with pent-up demand building and car shoppers re-entering the market, the industry has shown signs of rebounding.
What does that mean for credit unions? In a word: Opportunity.
Much like other lenders, outside of captives, credit unions experienced a significant decline in automotive market share at the beginning of the pandemic. Automakers offered attractive incentive packages in hopes of reviving sales, and captives were the clear beneficiary. But with sales rebounding and fewer incentives being offered, now is the time for credit unions to recapture market share.
According to Experian’s “Q3 2020 State of the Automotive Finance Market” report, credit unions made up 10.61% of the new vehicle finance market, down from 11.59% a year ago. Similarly, credit unions also experienced a decline in the used vehicle finance market; however, the decrease was much less – dropping from 29.42% to 29.08% over the same period.
To define the path forward, some credit unions may revisit growth strategies from previous downturns, but we need to remember the past few months are unlike any we’ve experienced before. Gaining insight into the current market will better position credit unions to navigate the next few months and beyond.
A Shift Back to Used Vehicles
In Q3 2020, we observed borrowers returning to the used vehicle market – a market where credit unions have the second highest share among lenders. It was a trend that was disrupted by automaker incentives at the beginning of the pandemic. The highest percentage of borrowers opting for used financing fall within the prime-plus segments at more than 55%, up from 52.62% a year ago. However, the percentages of subprime and deep subprime borrowers opting for used vehicles showed the largest increases during the quarter, growing 3.37% and 2.85%, respectively. In both scenarios, the shift back to the used vehicle market is likely driven by more budget-friendly options.
For example, the average new vehicle loan amount during the quarter was $34,635, a more than $2,000 increase from a year ago. Comparatively, the average used vehicle loan amount was $21,438. Meanwhile, the average monthly payment for a new vehicle was $563, up from $552 during the previous year, and the average monthly payment for a used vehicle was $397.
With consumers still recovering from the financial impact of COVID-19, we could see sustained growth in the used vehicle market, particularly with fewer new vehicle incentives being offered.
Consumers Take Advantage of Extended Terms and Lower Rates
In addition to shifting to the used vehicle market, we’ve observed consumers continuing to extend loan terms and take advantage of lower interest rates to keep monthly payments manageable. The average used vehicle loan was 65.15 months, up from 64.49 months the previous year. The increase in average loan term for a used vehicle was driven by growth in the 61- and 72-month (increasing 1.44%) and 73- and 84-month (increasing 4.16%) brackets.
In addition to extending loan terms, borrowers also benefited from lower interest rates. The average interest rate for a used vehicle loan was 8.43%, down from 9.09%.
30- and 60-day Delinquency Rates Remain Low
Despite the monumental shifts across the automotive industry and financial challenges experienced across the nation, borrowers continued to find ways to make their monthly payments on time. The 30-day delinquency rate improved to 1.56% during Q3 2020, down from 2.25% the previous year, while the 60-day delinquency rate was 0.51%, down from 0.75% over the same period. Some of the improvement is likely attributed to the financial assistance programs implemented during the first few months of the pandemic, but nonetheless, it’s a positive sign for the industry. Credit unions and other lenders should keep a close eye on how these rates evolve over the coming months.
The past few months have been a rollercoaster to say the least, and the next few months may mirror some of that. But with sales beginning to rebound, the automotive market is poised for a recovery in 2021. In order for credit unions to maximize market share and see growth in the coming year, it’ll be important to assess the current market and adapt accordingly. Doing so will help them make more strategic decisions and help car shoppers find loans that work for them.
Melinda Zabritski is senior director of automotive financial solutions for Experian, headquartered in Schaumburg, Ill.