The Perfect Storm for Increasing Auto Finance Market Share

Credit union market share in the auto loan segment is down. New car loans have fallen 6.5% to $137.9 billion – the lowest portfolio value since March 2018. At the same time, car prices are rising, incentives are disappearing and inventory is incredibly tight.

It sounds like the perfect storm for an auto loan portfolio disaster. It’s not.

In fact, it’s an opportunity for credit unions to be a key part of the auto finance solution during COVID-19 recovery. The somewhat surprising fact is that despite all the turbulence, today’s car shoppers are still interested in buying. Which means auto dealers must be more competitive and will need non-traditional lending options to get the best deal for customers.

The Pandemic Created a Perfect Storm

If you thought 2020 was a strange year in automotive financing, well, 2021 is shaping up to be even more challenging. Legacy issues from COVID-19, along with intractable manufacturing challenges, have created a retail environment where consumers want to buy while dealers face financing and supply hurdles. Following are the key issues currently facing dealers:

• Sputtering inventory availability: If you don’t have cars, you can’t sell cars. That simple fact is confounding many a dealer as the pandemic begins to shrink in the rearview mirror. The COVID-19 manufacturer shutdowns last year put a wrench in the entire production and supply process for vehicles, and the ongoing lack of parts – from microchips to batteries to rubber – has made maintaining vehicle inventory a recurring issue that some experts say will last deep into 2022. It’s a tough situation: Many manufacturers are building vehicles, but then parking them at storage facilities because they can’t install the rest of the parts in them. Other automakers are simply removing features and selling slimmed down versions of their vehicles.
• Incentives fall while transaction prices rise: Demand is growing and vehicle prices are getting higher, but dealers shouldn’t expect any discounts or rebates to help them sell their vehicles. With so little inventory, and such high demand, manufacturers don’t need to offer incentives to move their inventory. Dealers, on the other hand, are still competing with other dealers, and without manufacturer incentives they have little wiggle room to offer a good deal to their buyers while maintaining their margins.
• Customer service is hamstrung: The inventory situation means that sales and finance teams are forced to dig deeper into what buyers want and how they plan to use their vehicles – and face the unpleasant task of limiting customer expectations. Buyers simply have to make a few concessions; they just can’t get exactly what they want right now because dealers and automakers can’t get the parts. However, those dealerships, and the credit unions that work with them, can make the transaction positive despite the circumstances by providing leasing as a finance choice.

This lingering drama means that surviving (and thriving) through 2021 and 2022 will require a creative approach for dealers and the credit unions that serve them.

Seizing the Opportunity

These days dealers need options, and they need partners that will help them through this process. It won’t be easy though. It’s simple math: Supplier and automaker experts say that there will be 30% fewer vehicles produced this year. That makes each and every transaction a must-have opportunity. Credit unions can prepare to help dealers by keeping in mind the following points:

1. Financing options will win. As the year goes on, dealers will become increasingly aggressive in terms of finding ways to finance their transactions; the traditional one-size-fits-all approach will no longer work. This is an opportunity for credit unions to fill a need that larger banks and national lenders can’t – including used car financing.

2. Customer service in a fast-paced market requires real-time flexibility. Of course, some things take time. But we’re seeing the market change so quickly that many credit unions can’t keep pace. For example, we have seen credit unions that were unable to make pricing adjustments as quickly as needed, and they lost opportunities as a result. We’ve also seen other credit unions become more aggressive in the way that they’re offering some of their lending options, which helped them increase market share.

Having flexibility means being strategic and solving for the ultimate problem: There are just not that many cars to sell. If credit unions aren’t willing or able to work with dealers by quoting payoffs faster, expediting titles quicker, and trying to make the overall pay-off go a little easier, it’s a missed opportunity. Those that do will likely enjoy increased lending opportunities in the second half of the year and into next year as the market gains a stronger foothold.

3. Leasing is the answer to the question dealers are asking. Say you’re a dealer, and you’re faced with a retail environment that includes dramatically less inventory, lowered incentives and higher prices. That’s a real dilemma – and one that requires financing solutions that meet the moment. One such option is leasing: The consumer gets a shorter window with a vehicle that may not have everything they want, and they also get a more comfortable monthly payment.

Here’s an example: Some Chrysler stores have been using indirect leasing incentives, which can be higher than retail incentives. That puts customers in a more equitable position, and with a lower monthly payment. It’s the same thing on the pre-owned side: Used vehicle leasing is making a comeback because prices are at an all-time high and it gives consumers a viable, lower-priced option. We also see dealers upselling on leasing programs, especially on trucks and SUVs. Many of their same products can be sold on leased vehicles such as additional service contracts, tire-and-wheel packages, and more. The lower monthly payment creates opportunities, and more dealers are taking notice.

Leasing can help incentivize aged inventory, limit the ownership cycle and help people get into a new vehicle at a comfortable payment – even during this current environment. Leasing is a strong solution exactly because it offers the flexibility required by car buyers to solve those stifling issues. Case in point: Today we see more people select the 5,000-, 7,500-, 10,000-, and 12,000-mile option than ever before. Why? Remote work (another pandemic legacy) is spurring customers to reassess their driving habits.

Leasing also offers an excellent opportunity for credit unions to diversify their portfolios and increase membership, yield and market share. And there is plenty of room in the credit union landscape: Vehicle leasing is offered by less than 1.8% of credit unions nationwide.

Looking Ahead

Today’s auto finance market is different from any we’ve ever seen and more demanding. The pandemic introduced the auto industry to new, systemic complications and exacerbated existing defects, creating challenges that are especially acute in the retail sector. As a result, dealers aren’t as focused on profitability as they are on growth and market share – building for a return to normalcy in the coming years.

Credit unions have an opportunity to be true partners for dealers and provide a leasing program that encapsulates all that credit unions are known for: Sterling customer service, creative financing solutions and process flexibility. The pandemic may have created a perfect storm, but it also created the perfect opportunity to build your auto finance portfolio in new ways.

Mark Chandler is Vice President, Business Development for CULA in San Diego.