There's good news and bad news for credit unions on the auto lending front: the good news is that purchase volumes are high, delinquencies are low and new buyers are continuing to enter the market.
The bad news is that this may be as good as it gets.
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Delinquency rates nationally declined from 1.16% in the first three months of 2014 to 0.99% in 2015. Auto loan debt per borrower continues to rise—as it has consistently since 2010—with the current figure standing at $17,508—a 3.8% increase over Q1 last year.
No matter the numbers, industry experts agree: you can credit all of this to the economy.
"Delinquencies are down near historic lows; that's a reflection of strength in the economy," said Jason Laky, SVP and automotive business leader at TransUnion. "A lot of people will say it's not been as strong an economic recovery as it could be, but I would argue it's been a slow and steady recovery, and now four or five years into this recovery, Americans are feeling more confident."
The other good news for delinquencies, according to Laky, is that auto loans have always been "at the top of the consumer payment hierarchy." In other words, even in bad times consumers try to make those payments first. And because CUs have a unique relationship with their members, he added, they are often in a position to benefit from this even more so than other lenders might.
According to data from CU Direct, millennials account for about one-in-three (29.5%) of all funded new car applications, and 41.3% of all funded used car applications. In all, said President and CEO Tony Boutellle, that's 37.3% of all funded loans.
"The driver of all of this is obviously the economy," Boutellle said, pointing to a stronger jobs market for new college grads than the past several years. "When they get a job, they buy a car."
While the number of young buyers is up, TransUnion reported a slight lift—from 1.49% to 1.52%—in those buyers' delinquency rates. But Laky said that rise shouldn't be anything for credit unions to worry about and is likely only the result of such a high number of young consumers entering the market.
"It's a very small increase on a very small base," he said. "This is still a generation that is hungry for credit—a good risk, even at that level—and exactly the type of consumer that you can establish that relationship and membership with, and they'll remember you and continue to be a part of your credit union for the remainder of their lives, we hope."
Steve Klees, SVP of specialty channels at EFG, said there may be some additional delinquencies, but by and large those numbers have bottomed out—a notion CU Direct's Boutelle agreed with.
"The reason I say that is because I believe that the subprime/near-prime market—not prime—still represents a large chunk of that pent-up demand," said Klees, "and as we get further into additional subprime/near-prime auto loans being made, we're going to see the delinquency rate offset by the prime business, which I think is really driving this now."
Buying for Value
One other element that's helping keep delinquencies low, according to CU Direct's Boutelle, is that consumers learned their lesson after the Great Recession.
"Part of the challenge going into 2007 that hurt a lot of people—not just Millennials—was people were buying cars based on their ego versus based on what they could really afford," he explained. CU Direct's top three models purchased on loans funded overall today are Chevy Silverado, the Honda Accord and Ford F-150. Drilled down to the Millennial level, it's the Silverado, Accord and Honda Civic. That's an illustration that consumers today are being more practical, he said.
"If you saw Porches and Bentleys in the top three, that would be a bit of a concern, but it looks like [consumers] are buying for the transportation value," he said.
Several months of low gas prices have also helped, but many credit unions have told CU Journal that in spite of saving money at the pump, members are keeping that extra money rather than spending it on a more expensive car.
Laky said that TransUnion doesn't break down its data to attribute behavior to gas prices, but predicted that as long as consumers are saving money at the pump, those extra dollars in people's wallets will eventually make its way into members' spending.
"A lot of [the low gas prices] happened as we headed into a pretty harsh winter, and as we head into summer maybe we'll see consumers open their wallets a bit and that will turn into additional vehicle demand," he said.
Auto trade journals are signaling a shift from small cars back toward SUVs and other large vehicles, which could be a reflection of lower gas prices, according to Laky.
But Klees said that "value cars" that are dependable, affordable and get good mileage continue to be strong sellers, especially among millennials.
"I still believe you'll see a shift away from SUVs, away from trucks, away from 14 miles-per-gallon," Klees said.
While young consumers want safety, value and environmentally friendly vehicles, many members over age 40 are less concerned with gas prices and more concerned about lifestyle—a comfortable car that they can use to haul teenagers around but that might not get the best mileage, he said. "You just see a lot of money with consumers 40 and older that are saying 'Gas prices be damned, I'm going to drive what I want to drive.'"
In It for the Long Haul
A strong economy and more durable, longer-lasting cars are also leading to an increase in lending terms, with some lenders—including credit unions—pushing terms on new car loans out as long as seven or eight years.
"A long term can be a good thing for making an affordable loan to that term for the member if the term of that loan closely matches the expected lifetime or usage of the vehicle," said TransUnion's Laky. "If you plan to own a car for seven years, at a good rate, the credit union does a good service by giving a seven-year term, because it makes the car more affordable. If you plan to trade the car in in three years, maybe taking a longer term creates a little more risk both for you and the credit union."
EFG's Klees said that while he has a hard time imagining 84 months as the new standard for new auto loans, longer terms offer credit unions an opportunity to serve their members with flexible terms.
"Credit unions have the flexibility and freedom of going with whatever term they want, whether it's 69 months or 64 months, so [CUs might consider] taking a look at a customized term approach tied into monthly payment for each individual member," he said. While that's not done very often, it offers credit unions a chance to get creative.
