Finding Vehicle Affordability Solutions Amid Over-Extension Worries

Recently, Credit Union Leasing of America (CULA) released findings from its used vehicle loan snapshot, a survey of over 400 credit union professionals between April 4 and May 5, 2023, and the findings were clear and unambiguous: Credit unions are worried about over-extension on used vehicle loans. In fact, a stunning 64% cited over-extension on used loans as their biggest concern, followed by vehicle prices. According to the survey, 80% of respondents said that at least one in four used vehicle loans are now 72 to 84 months. What’s more, of credit unions reporting that 84 months is their longest term, a majority said they make up 20% or more of their vehicle loan portfolio – and nearly a third said they make up over 40%. Other industry analysts are reporting the same theme: Experian’s Q1 State of the Automotive Market Report showed that 30% of used loans are 73 to 84 months or more.

Here are a few key highlights from CULA’s Q2 2023 Used Vehicle Loan Snapshot that underscore this concern about over-extension, but that also illustrate that credit unions are continuing to meet the needs of their members:

• 70% of survey takers offer buyers a significant percentage of longer-term loans, such as financing of 72 months or more with low down payments, on high-mileage, older vehicles.
• 71% will lend $75,000 or more on a used vehicle, with one-third saying they would lend $100,000 or more.
• 30% of respondents have extended their acceptable used car mileage limit to 100,000 miles or more.
• 55% are extending the LTV by over 125%.
• 58% say they require a 10% or less down payment on used vehicle loans – and only 14% ask for more than 20%.
• 76% of credit union respondents have a mileage limit on their used vehicles of 75,000 miles or more, with 30% extending that limit to 100,000 miles or more.

Concern about over-extension, and the steps credit unions are taking, reflect used vehicle affordability. Yet when it comes to the types of vehicles people actually buy, like pick-ups and SUVs, prices are high. In fact, according to Cox Automotive, wholesale (adjusted) used-vehicle prices rose 0.1% in August, as the mid-month Manheim Used Vehicle Value Index rose to 212.0. That’s down 7.8% from the full month of August 2022. According to Edmunds, even with a slight softening in prices used vehicles averaged an astonishing $28,381 in Q1 2023, a 44% increase from Q1 2018. With many consumers paying such high prices for used vehicles compared to pre-pandemic prices, they are more vulnerable to finding themselves with negative equity, firmly upside down on their loans.

The reality is that improving affordability for used vehicles is a stubborn challenge that’s taking time. And this is why credit unions are finding ways to make used vehicles more affordable for their members. After all, serving people is what credit unions do best.

Credit unions are using longer term loans to lower down payments, unfortunately, on older, used vehicles that present potential risk. Interestingly, data from the survey also showed that the vast majority of credit unions agree that they would like a better alternative, such as short-term financing with affordable payments and higher yield. One finance product that checks all those boxes is vehicle leasing, which provides short-term financing with affordable payments and higher yield. It’s an option that can meet the needs of people and can also reduce the concern of over-extension. At CULA, we see first-hand the appeal of vehicle leasing for credit union members as an antidote for high prices, having originated 64,000 leases (up from 50,000 in 2021) for $2.7 billion in 2022, a single year record.

The popularity of vehicle leasing shows that credit unions are finding ways to stretch effectively and serve their members by making life possible – and as affordable as possible – with loans and leases that perform up to expectations. And while the survey revealed concerns about over-extension, it also confirmed that this anxiety is driven by the utter lack of affordability, which is why survey respondents said that their auto finance customers are interested in either long-term loans of seven years or more (52%) or short-term loans on a newer vehicle for a low payment (48%). Consumers are either looking for the lower payments of a long-term loan, or the lower commitment of a short-term loan.

Credit unions are finding solutions for their members, despite high prices, whether it be longer term loans, low down payments – or vehicle leasing. Leasing provides relief from the high price of vehicles without the risk of longer term loans. In fact, one credit union found that leasing not only provided members with a better car buying alternative, but also helped grow their auto portfolio despite continuing vehicle affordability issues: A low risk, strong yield option that allowed for more payment flexibility.

The state of auto financing is in a long, gradual evolution away from the pandemic and resulting recovery … and toward new challenges and opportunities for members and credit unions. This quarter’s survey shows how this evolution is progressing, and points the way forward: To be successful in a future of constant economic flux, credit unions must be nimble and offer members expanded options for vehicle finance.

Mark Chandler is Vice President, Business Development for Credit Union Leasing of America (CULA) in San Diego.