MADISON, Wis. (9/17/12)--The auto lending market is experiencing three changes that can translate to more competition--and opportunity--for credit unions in what has long been their bread-and-butter loan portfolio.
- A pent-up demand from consumers who held onto their vehicles throughout the Great Recession and are now beginning to buy again;
- A change in auto-buying behavior as consumers keep their vehicles longer; and
- A recent loosening of credit as investors make more funds available to lend as a result of a drop in auto delinquencies.
AnAutoMD.com survey of nearly 4,000 automobile owners, indicates that three out of four agree that buying a vehicle every two to three years is a thing of the past (LoneStar Leaguer
Aug. 27). The appropriate lifespan for hanging onto their vehicle is, according to 78% of those surveyed, now 10 or more years (or until the vehicle dies). More than half of them said a better economy would not change their habit of holding onto their vehicle longer.
Sixty percent say their primary vehicle has more than 100,000 miles, and 66% believe they can get as much as 160,000 miles before they trade it in. That averages to 75,000 more miles on the car than on their previous car when they traded it in.
The trend toward holding on to vehicles longer means that:
- Credit unions won't be making or refinancing as many car loans to the same member. If a member keeps the car for 10 years, instead of trading in every two to three years, that is two fewer car loans to that individual during that period.
- Trade-in value for an older car will complicate the loan procedure. "Without question, the market has become increasingly more complex as people do not have trade-able equity in their vehicles," Dale Hansard, president/CEO of Caprock FCU, Lamesa, Texas, told the Texas Credit Union League in the LoneStar Leaguer. He indicated auto dealers are offering "soft dollar" rebates as incentives to trade, but "the simple fact is that the members do not have the income flexibility to handle an increased payment."
Auto loans are increasing for credit unions. New- and used-auto loans rose by 2.8%, according to second-quarter call report date from the National Credit Union Administration (Las Vegas Business journal Sept. 14).
Credit unions' used-car lending in June outpaced new-car lending; used-car loans were up 4.3% over June 2011, according to Credit Union National Association statistics. However, these may not be for late model used-cars because prices of late-model used cars are approaching those of new cars, according to Kelley Blue Book. With the average age of vehicles on the road at 10.8 years, fewer used models are up for grabs and this has had an inverse effect on residual value (Reynolds Center businessjournalism.org
Low auto delinquencies also are impacting the market. During first quarter of 2012, auto loan delinquencies were below the year-ago level for 10 consecutive quarters.. Now investors are investing in the types of bundled securities pools that make more funds available for auto lenders (cnbc.com
Sept. 13 and LoneStar Leaguer
Sept. 6). That will translate to more loans available to meet the pent-up demand, both among prime borrowers and subprime borrowers. Credit unions, which continued to make loans through the recession, will now see more competitors getting back into the auto lending market.
What are credit unions doing to keep their place in the market? Caprock FCU's Hansard noted that its overall loan growth is roughly 7.5%. It recently began offering incentives for refinances to maintain its growth. Members are opting more for extended warranties because they are keeping their vehicles longer.
Credit unions are sweetening the deal with low auto rates. Gobankingrates.com
recently reported several credit unions announcing low annual percentage rates (APR) on auto loans. They included Chicago (Ill.) Area Office FCU and Van Cortlandt Cooperative FCU, Bronx, N.Y., each offering 3.99% APR, and Mosaic FCU in Harrisonburg, Va., which offered 3.95%.
They also are getting more creative in their efforts to attract loans. For example, AEA FCU, Yuma, Ariz., gives back 1% of its auto loan balances to charity. Its Go Direct Initiative commits a $10,000 donation to a community service organization when it reaches the $200,000 milestone, according to the $238 million asset credit union's website.
U.S. car sales recorded their best August in five years, at an annualized 14.5 million, which exceeded the 14.4 million forecast by Edmunds.com. Edmunds noted that interest rates are pretty high, the risk is fairly low, and the market is a good deal for investors (cnbc.com