Credit Unions Are at a Crossroads With Auto Loans

Credit unions have traditionally been significant players in the auto loan market, offering competitive rates and personalized service. Throughout 2021 and 2022, they leveraged aggressive prices and strong member-focused strategies to make significant gains in vehicle financing market share.

2023 was a different story for credit unions, which experienced a 5% decline throughout the year, dropping behind banks and captives in the auto loan pricing wars. This decline underscores the need for credit unions to reassess their strategies and leverage new opportunities to remain competitive.

The auto lending landscape is highly competitive, with numerous players vying for dominance. Credit unions need to decide where and with whom they want to compete. This decision is critical as it shapes the credit union’s approach to market engagement and resource allocation.

One of the significant challenges credit unions face is the profitability of indirect auto loans. Indirect auto loans are not profitable for some credit unions, while captives face stiff headwinds. This suggests that credit unions must carefully evaluate the profitability of their loan portfolios and consider direct lending channels that may offer better margins.

The good news for credit unions is that they can keep up with banks and captives by implementing pricing analytics. Traditionally, credit union pricing strategies have had simple structures, but by using technology to help identify cohorts of the population where it’s worth competing, there is an opportunity for margin growth. Doing so creates more sophisticated pricing strategies and a more regular pricing cadence. This type of optimization enables leveraging data that will help credit unions keep up with banks and captives.

Here, we’ll outline strategies for regaining market share.

Embracing Electric Vehicle Lending

The auto industry is undergoing a transformative shift toward electric vehicles (EVs). This shift presents both opportunities and challenges for credit unions. Credit unions should take a disciplined approach to capitalizing on new opportunities in auto lending. The involvement of credit unions in electric car lending is still emerging, with Tesla’s relationships with some lenders being one of the few well-known examples.

Electric vehicle demand behaves differently than conventional vehicle demand, and the market dynamics are still evolving. Predicting residual and resale values for EVs is complex, impacting loan pricing and risk assessment. Credit unions must develop expertise in this area to serve the growing EV market effectively.

Adapting to Rising Interest Rates With Different Pricing Tiers

The macroeconomic environment, characterized by rising interest rates, is another critical factor influencing auto lending. Captive lenders are particularly affected as they grapple with increased costs of funds. In response, captives are now focusing on pricing strategies to maintain competitiveness.

Rising interest rates also impact consumer behavior and demand. Consumers may become more price-sensitive, leading to changes in borrowing patterns. Dealers face challenges in pricing cars due to fluctuating market conditions and high vehicle prices, affecting loan demand.

Effective pricing strategies enable credit unions to compete across different credit tiers. To ensure member satisfaction, credit unions must find the gray area between sensitivity to price and profitability, particularly when targeting high-demand, super-prime borrowers. Lenders often aggressively pursue these customers due to their low default risk.

On the other end of the spectrum, credit unions are expanding loan volumes to lower FICO score borrowers, adapting to changing market conditions. This strategy can help credit unions grow their member base but requires careful risk management and pricing granularity, especially for subprime lending.

Transparency and Accessibility in Lending Practices

Transparency and accessibility are crucial elements of credit union lending practices. Credit unions must be cautious about perceived discrimination in lending, which can damage their reputation and regulatory standing. Clear communication about loan decision factors is essential to maintain trust and compliance.

Pricing science can help lenders maximize profitability while achieving their goals. This involves using data analytics to refine pricing models, making loans more attractive to a broader range of borrowers without compromising financial stability.

Specialization and Technological Integration

In a crowded market, specialization can be a key differentiator. We worked with one credit union specializing in motorcycle loans and succeeded despite a crowded market because of their motorcycle expertise. Similarly, focusing on niches like wheelchair-accessible vehicles can help credit unions stand out and attract dedicated member segments.

Technology plays a crucial role in modern auto lending. Tech companies in the space are demonstrating rapid growth in auto lending through acquiring a mainstream lender’s dealer network. This move highlights the potential benefits for credit unions that embrace technological advancements. Outsourcing auto lending to access cutting-edge technology and leveraging third-party expertise can give credit unions a competitive edge.

What’s Next for Credit Unions and Auto Loans?

Credit unions are at a crossroads in the auto lending market. To regain and grow their market share, they must strategically position themselves and embrace new opportunities. Pricing strategies tailored to different credit tiers, transparency in lending practices and specialization in niche markets can further enhance their competitiveness. By integrating advanced technology and leveraging data analytics, credit unions will unlock new potential and continue to serve their members effectively in the evolving auto lending landscape.

William Ely is Banking Solutions Architect for Earnix, a global provider of insurance and banking operations solutions.