Opportunity Exists for Credit Unions in Evolving Automotive Market

For the past year, the automotive market has been unpredictable, evolving and shifting seemingly every month. And while the industry is starting to experience the positive effects of a slow rebound, the market still remains fluid. Despite this, many industry players, including lenders, have an opportunity to continue to move further along the road to recovery; they just need to stay close to the trends.

Through the challenges of the past year, perhaps the most notable trend was that captives were the only lender that managed to maintain, and even grow, their market share; this was namely driven by a shift back to new vehicles. With competitive incentive programs and a decrease in used vehicle inventory, captives were well-positioned for success.

The story was a bit dimmer for credit unions. According to Experian’s Q4 2020 State of the Automotive Finance Market report, credit unions held 10.63% of the market for new financing, down from 11.06% in Q4 2019. Similarly, in the used space, they held 23.79%, down from 23.94% last year. However, there is still room for credit unions to recapture market share.

Opportunity in the Used Vehicle Market

While we observed a smaller percentage of consumers financing used vehicles in Q4 2020, it’s important to remember that used vehicles remain a top choice for many prospective vehicle shoppers. And with credit unions holding the second highest market share for used vehicles, there is still room for growth in this area – particularly as affordability becomes more of a concern.

Experian research showed the percentage of used vehicles with financing decreased from 40.84% in Q4 2019 to 34.59% in Q4 2020. However, used vehicles still accounted for 52.85% of financed vehicles.

At the same time, the average loan amount for a used vehicle increased just over $1,600 in Q4 2020, coming in at $22,467. Meanwhile, the average monthly payment for a used loan also increased, now $413 compared to $395 a year ago. With inventory still somewhat limited, we can expect used vehicle prices to continue to increase, however, used vehicles are likely still the more affordable option for many consumers when compared to new vehicles.

For example, the average loan amount for new vehicles increased from $33,255 in Q4 2019 to $35,228 in Q4 2020. That is over $10,000 more than the average loan amount for a used vehicle. New loan monthly payments also increased more than $10, coming in at $576 this year.

With many new vehicle incentive programs becoming fewer and far between, we might see consumers shift back into the used vehicle market, which is a positive for credit unions.

Tapping Into Expanded FCRA Data to Increase Opportunity

Credit unions tend to rely heavily on prime and super prime borrowers, and it just so happens that these consumers are the ones shifting into the new vehicle market – it clearly impacts originations. But what if credit unions could expand the universe of potential borrowers without compromising risk tolerance? By layering traditional credit data with expanded Fair Credit Reporting Act (FCRA) compliant data attributes, lenders can examine all aspects of a consumer’s financial capacity while creating a more detailed view of their stability, ability and willingness to repay. Often, incorporating these data assets helps lenders make approvals they otherwise couldn’t or wouldn’t.

There are more than 100 million consumers who lack effective access to credit today either due to a subprime credit score or a limited credit history. Many of these consumers have a proven track record of making timely payments for items not traditionally factored into their credit history. While these consumers may have limited experience with credit cards, student loans or other forms of traditional credit, these individuals may be servicing on-time monthly, recurring bills for utilities, telco and streaming services. Empowering consumers by factoring these predictive data points along with traditional credit data can not only broaden a customer base, but also provide opportunity for consumers who are often excluded from the credit economy.

Further, looking at trended data, including public records, or how an applicant has managed a payday loan or their credit accounts over a 24-month period, makes that picture of creditworthiness even clearer. The newest score models available from Experian make it easy for lenders to incorporate these expanded FCRA attributes into their decisioning, resulting in more approvals with less risk.

Delinquency Rates Remain Low

Despite affordability concerns, the percentage of vehicle loans and leases that are either 30 or 60 days delinquent decreased year-over-year. Thirty-day delinquencies decreased from 2.31% in Q4 2019 to 1.75% in Q4 2020. Meanwhile, 60-day delinquencies decreased from 0.79% to 0.60% over the same time period. While this is an overall positive sign for the auto industry, trends continue to shift, and it will be important to monitor these rates over time.

The automotive landscape is much different than it was one year ago and will likely continue to change and evolve over the coming months. For credit unions, the key to growth lies in digging into the data and trends as they are happening in order to leverage them to expand market share and encourage growth. In doing so, credit unions can not only support their business goals, but provide options that meet consumer needs on the road to recovery from the pandemic.

Melinda Zabritski is senior director of automotive financial solutions for Experian, headquartered in Schaumburg, Ill.