Automotive Sales: Something’s Gotta Give

No, I am not talking about the 2003 movie starring Diane Keaton, Jack Nicholson and Keanu Reeves, although I love a good romantic comedy. I am talking about the automotive sales space where, I think we can all agree, something’s got to give as concerns for lenders and consumers keep mounting, starting with soaring new and used car prices. In 2023, used cars averaged $28,381, a breathtaking 44% increase in just five years according to Edmunds. After hitting a low point in December 2021, interest rates have also skyrocketed. By September of 2023, rates on car loans had reached a historic 7.5%, further straining consumer’s ability to buy and maintain their repayment schedule.

Something’s gotta give.

To meet buyers’ needs, lenders have been extending loan terms, approving loans for cars with higher mileage, and decreasing the required down payment for car loans. While it is true that these tactics seem to be working (Cox Automotive reports double-digit year-over-year gains in sales for nearly all makes and models, some as much as 40%), there is an underlying unease. Is this trend sustainable? Surely, there will be a tipping point at which this model is no longer financially stable for consumers, lenders or the industry.

Something’s gotta give.

In 2022, according to Edmunds, over one third of new vehicle loans were for a 73-84-month term, while the average price of a new vehicle today is nearly $48,000, according to Kelley Blue Book, a third higher than just five years ago. In addition, most cars sell at their full asking prices, absent of the kind of rebates and discounts advertised in the past. I agree with Business Insider, which noted, “While many shoppers have indicated they are willing to pay more for luxury vehicles and upscale features, the new and used vehicle cost dynamics, coupled with today’s interest rates, are pricing a lot of other shoppers out of the car-buying market entirely.”

This is hardly surprising given that the average monthly payment on an auto loan is a record-high $716. Nor is it surprising that auto loans comprise the third highest share of consumer debt, outpaced only by mortgages and student loans – and these loans are getting longer and longer. Seventy percent of credit unions report in our recent CULA survey that their long-term auto loans are 72 months or longer.

These are signs of a bubble in the making, so is it any wonder that credit unions are showing trepidation? In the same survey, their number one concern was over-extension on used vehicle loans, with 64% citing it as their top stressor. Twenty-eight percent reported that their longest-term loans were 84 months; and, of those, nearly one-third say these lengthy loans make up 40% of their portfolio. If this trend continues, how long will it be until we start to see loans for 96 or even 120 months for assets that aren’t anticipated to last much longer (or possibly less) than that?

Something’s gotta give.

Heading off this perfect storm, where everyone has the potential to lose, requires a paradigm shift in the automotive financing landscape. Practical creativity is needed to maintain accessible auto loans for consumers, while protecting lenders from inevitable market fluctuations. This means embracing flexibility, adaptability and new approaches for financing as well as partnering with dealerships, all to accomplish that credit union dream scenario of a diverse portfolio, higher yields and lower-risk loans. A dream that must be balanced with what is ideal for buyers: Manageable four-year loan terms, relief from protracted payment plans and terms aligned with their realistic financial capacities. But, stubbornly high prices and interest rates compound the difficulty of establishing simultaneous affordable payments and credit union profitability – this will take time to normalize.

Alternative models, such as shared ownership and leasing, are key to this shift. Our data shows significant increases in credit union members opting for leasing. It makes sense because leasing’s generally lower monthly payments appeal to customers looking to stretch their budgets and make car ownership fit into their current financial structure. It’s also more sustainable for lending institutions: Credit unions now trail behind banks by only 2% when it comes to the overall share of these loans.

Deeper partnerships with dealerships can also create new benefits, such as leveraging dealership insights to mitigate over-extension risks, gaining a window into local market finance trends, streamlining the loan approval process, offering members more customized loan packets and even bringing in dealership staff as credit union members. Expanding dealer partnerships and the adoption of leasing by credit unions are just two examples of how our industry can pivot when the reality is that something is going to have to give – and an example of a solution that gives to both lender and consumer.

Something is, in fact, giving …

Rather than teetering on the precipice of a terrifying descent, with industry-wide innovation, collaboration and practical creativity, we can, instead, be on the edge of sustainable growth and a nimble market that adapts to macroeconomic conditions and consumer needs. Extending loan terms and escalating prices are causing anxiety for credit unions, so finding sensible solutions to navigate this new common ground is a rare opportunity. Credit unions, as influential stakeholders, have a unique opportunity to, for example, collaborate with industry associations and regulatory bodies to establish guidelines that ensure responsible lending practices and sustainable financing models. I have worked with credit unions for decades and know that there are few other lending institutions as resilient or as well-poised to adapt to change as they are. I have every confidence that as this crazy, unprecedented market starts to “give” way, they will be ready to meet the challenge.

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