The popularity of car sharing is creating headaches for credit unions making auto loans.
Auto loans are a bread-and-butter product for the credit union industry. During the first quarter, these credits increased by more than 7%, to $366.5 billion, from a year earlier, according to data from the National Credit Union Administration.
But more consumers are deciding to rent out their vehicles on car sharing apps or drive others around as a taxi service. That means there are additional risks for lenders, and credit unions may have to change their lending policies to address these concerns.
“Now the challenge that all lenders face is the residual value risk associated with a vehicle that’s getting driven a lot more than a personal vehicle would be,” said Brian Hamilton, vice president of innovation and insights at CU Direct.
There’s a couple of market forces at play, according to Hamilton. For one, cars continue to get more expensive to purchase, and the total cost of ownership, including monthly payments and insurance, is rising. The average price of new vehicles should hit $33,319, making it the highest price point ever for the first quarter, according to data from J.D. Power.
Because of this, more consumers are supplementing personal car ownership with income earned from car sharing and ride sharing. According to research from Ridester, the average car owner earns about $540 per month by using Turo, a car-sharing mobile app that allows owners to rent out their cars to others.
San Francisco-based Turo generated roughly $250 million in revenue last year and is now in 49 states. It has 10 million members and nearly 400,000 vehicles listed on its app.
Ride sharing should have the most impact in high density cities where consumers may decide to use apps like Uber to get to work rather than buying their own car, Hamilton said.
If a driver ramps up their mileage per month by driving others around as a taxi service or loaning their car out to make extra money, the value of the vehicle depreciates at a faster rate. That damages the value of the car, which is the credit union’s collateral on the loan.
To counter this, credit unions could implement variable payment loans, Hamilton said. Under this type of product, a CU could provide a monthly loan to a member, who is using their car for ride or car sharing, that correlates with the miles that the driver puts on the car. Borrowers who put more mileage on their vehicles would pay more for their loans, helping to offset the additional risk.
“Variable payment loans were exactly the way we were thinking of structuring loans,” said Jeremy Pinard, Alliant Credit Union’s vice president of consumer lending.
Credit unions could partner with car sharing apps, such as Turo, where consumers list their cars to rent out. Lenders could use these partnerships to track how much the borrower’s car is being driven and how much income they are earning. The credit union could then get additional payments put toward the loan to reduce risk around the collateral, Pinard said.
The $11.8 billion-asset Alliant has run into an issue where a member applied for a car loan. But the Chicago-based institution discovered that the member had multiple cars listed on Turo. The credit union was financing the member’s leasing of those vehicles. Using the leased vehicles for car sharing was against its policies.
After confirming this, Alliant was unable to approve the new loan.
This is a problem that CUs are going to have to solve, Pinard said, noting that it can be difficult to turn down a loan for a member with a strong credit rating because they want to list their vehicles on car sharing networks.
“How do you do that? How do you make that loan?” he asked.
