Experian: Lower Rates Help Credit Unions Grab Q2 Auto Loans

Offering lower interest rates was a major reason credit unions amassed a share of auto loan originations in the second quarter that set a record going back to at least 2007, an Experian analyst said.

Experian’s “State of the Automotive Finance Market” report for the second quarter released Aug. 25 showed credit unions produced 25.8% of the loans and leases from lenders in the three months ending June 30, up from 18.3% a year earlier and 22.1% in this year’s first quarter.

Credit unions were second only to banks’ 27.9% share and surpassed captive lenders’ 22.6% share in the second quarter.

The Experian report showed credit unions setting records for new and used auto originations going back to at least 2017.

But in an interview with CU Times on Aug. 26, Melinda Zabritski, Experian’s senior director of automotive financial solutions and the report’s author, said the volumes for the second quarter were higher than any period in her records, which go back to 2007.

“This is the highest we’ve seen credit union share,” Zabritski said.

The previous high for credit unions was about 23% of loans and leases for new and used vehicles in the third quarter of 2018.

Experian found credit unions’ biggest gain was in new cars, where the credit union share was 21.4% — nearly double the 11.2% from a year earlier and up from 15.8% in the first quarter. In used cars, the credit union share was 28.6% in the second quarter, up from 23.5% a year earlier and 26.5% in the first quarter.

Experian measures numbers of loans and leases, but the trend is similar when comparing portfolio balances measured by the Fed and CUNA.

The Fed and CUNA data showed credit unions held 33.7% of the nation’s auto loan balance as of June 30. The all-time high surpassed the previous record of 32.6% set in December 2018. The share was also up from 31.8% on March 31 and a low of 31.0% at the end of 2021’s second quarter.

Both Zabritski and CUNA Chief Economist Mike Schenk attributed much of the gain to credit unions offering lower interest rates to borrowers.

Schenk, in CUNA’s latest Economic Update video, said credit unions do a better job than banks and other lenders in providing the affordable credit people need to maintain reliable transportation to work.

“Getting to and from work is extremely important,” he said. “It helps ensure people’s financial well-being is on a firm footing.”

He cited DataTrac numbers that showed that credit unions were charging an average of 3.52% for a five-year loan of $38,000 on a new car on Aug. 22, compared with 4.72% by banks. Credit union borrowers had an average payment of $601, compared with $622 for banks, which Schenk said provided credit union members a saving of $1,247 over the life of the loan.

“Credit unions stand head and shoulders above other providers,” Schenk said.

Zabritski also found credit unions were offering lower rates in the second quarter.

“The other lender types actually have had a much more significant rate increase and the credit unions haven’t,” Zabritski said. “The credit union rates are significantly lower than the other lenders. Even on the used vehicle side, we’re talking over 200 basis points lower.”

“Credit union rates are actually down. Which is one reason average payments are lower at credit unions,” she said.

Zabritski said another factor benefitting credit unions is that captive lenders — the biggest share losers in the past year— have been offering few incentives since the supply of new vehicles has been constrained since early 2021.

Credit union share could wane, Zabritski said, but with new vehicle supplies constrained and with few incentives from captives, “you don’t have that, that competition on rate on the new vehicle side.”

Meanwhile, Jason Haley, chief investment officer for ALM First of Dallas, said credit unions need to be sure they’re not undercharging for loans.

Haley, speaking during Callahan & Associates’ quarterly Trendwatch webinar on Wednesday, said lending committees need to be constantly monitoring conditions, especially in volatile markets.

Credit union committees that meet monthly for loan pricing can be acting on data that’s turned. “Things can get stale really fast,” he said.

“It’s critical to maintain disciplined asset pricing when you’re in a volatile market,” Haley said. “Mispriced loans and poor asset pricing can definitely lead to liquidity issues down the road.”

Zabritski said another change in the market is that most borrowers have improved their credit scores since the COVID-19 pandemic began in March 2020.

“We’ve seen a continual migration in credit scores over the last several years,” she said. “We have a much larger percentage of the market that is prime.”

For example, people who took out a loan in 2017 have seen their credit scores rise 20 to 50 points.

Another change is that people who bought a used vehicle in 2017 often have seen their loan-to-value ratios fall.

Zabritski compared the original 2017 manufacturer’s suggested retail price (MSRP) on the top 10 used vehicles that people buy today (yes, mostly trucks) with their current used car value.

“In almost every case, the current used value is higher than the original MSRP,” she said. “So you’re finding situations where the vehicle sitting in your driveway is worth more today than it was when you bought it.”

So if you bought the car for $25,000, its worth now as a trade in is $25,000 and you owe just $15,000 on it, “you’ve got $10,000 in equity.”