Consumer Trends Open Doors for Credit Unions in Auto Financing

Last year, the Federal Reserve cut interest rates a total of three times as inflation began to recede. This came as a much-needed financial respite for Americans forced to contend with borrowing costs that reached their highest levels in 23 years.

Changes in consumer behavior continue to impact the auto financing industry, presenting a number of opportunities and challenges for lenders. If interest rates continue to fall, lenders may be able to loosen lending standards and expand their underwriting capacity. As lenders extend loans, consumers can spend more on a new vehicle as the cost to finance decreases. Despite captive lenders – those tied to automakers – accounting for a major percentage of auto loan originations, many consumers consider turning to credit unions to finance their vehicles. Credit unions can differentiate by offering better interest rates, along with flexible credit standards and repayment terms, as well as personalized service.

However, as data from the NCUA and the Fed indicates that auto loan originations have decreased for credit unions, many are seeking solutions to help them responsibly grow their auto loan portfolios while effectively managing risk and serving both existing and new members.

Recognizing and Addressing Risk

Although there is significant opportunity in the auto lending space, credit unions should be aware of risks and take a proactive approach in addressing potential issues. The auto market has taken a hit due to affordability issues caused by near-record car prices and high interest rates. What’s more, trade tariffs imposed by the current presidential administration could significantly influence car prices, though the full extent of their impact remains uncertain. As a result, many consumers have needed to stretch their budgets to purchase vehicles and meet ongoing monthly payments.

Additionally, delinquency rates for auto loans remain elevated. In 2024, delinquency among auto loans rose across all lender types, with credit unions experiencing a 5% increase year over year, according to a recent Equifax report. Coupled with delinquencies, CU loan balances among subprime consumers have also increased – 16.6% of auto loan balances at credit unions belonged to subprime consumers, according to the report.

It’s reasonable for these factors to cause concern, but credit unions can tackle these challenges by gaining a more holistic view of members’ ability to take on new credit along with their propensity to repay debt.

Enhancing Member Experience Through Insights and Alternative Data

Consumers often join credit unions for better rates, to support a smaller business model or to receive an additional level of care. Attracting and keeping members is a top priority for credit unions. To accomplish this, they can leverage consumer financial insights, gaining a broader view of a member’s overall financial position and unique needs.

This can be taken a step further by using alternative data sets to gain a more holistic picture of a potential borrower’s financial history. This consists of borrower information that may not be found in traditional credit reporting such as telecommunications, pay TV and utilities payment history.

Moreover, having the capability to instantly and seamlessly verify an applicant’s income and employment can help the credit union manage risk while enhancing member experience, especially when compared to historic methods such as requiring the member to find and provide paystubs or to provide their payroll credentials. Credit unions can use insights from these income and employment verifications to act quickly, engaging auto loan members with products that meet their needs, help increase secure transfer of their data and ultimately build loyalty.

The Gen Z Opportunity

Younger consumers are turning to credit unions for auto loans, pivoting away from banks and captive lenders. According to the Equifax report, 29% of Gen Z auto loan origination came from a credit union.

This can be attributed to credit unions often providing lower interest rates along with flexible credit standards and repayment terms. Additionally, as the first generation of digital natives, Gen Z is likely to navigate toward service providers that offer streamlined, instant and personalized experiences.

These auto loans may also provide credit unions with a foot in the door with their Gen Z clients for additional business. Some members of Gen Z make up a “young affluent” segment, that when compared to other young consumers, have 2.4 times higher income, according to Equifax, three times higher discretionary funds and 11.7 times higher deposits. With the decrease in auto loan originations, this young, affluent segment may be a lucrative option for credit unions to target.

Adopting member-focused strategies to better serve Gen Z paves the way for growth, as younger consumers begin seeking flexible, cost-effective lending alternatives. By staying proactive and member-focused, credit unions can strengthen their position in the auto lending space and effectively address risk.