Just in time for Halloween, some potentially scary headwinds are cropping up in the credit union auto lending space.
American consumers set a record for car purchases in 2015 and 2016 and then came close to a new record again last year. Expectations are generally positive for 2018 and heading into next year, experts said.
But pressures, such as changing preferences of younger consumers and rising interest rates, could slow demand for auto loans.
“Overall, we think automobile lending will be softer in 2019 compared to 2018,” said Mike Schenk, deputy chief advocacy officer for policy analysis and chief economist for the Credit Union National Association. “With that said, it will not be a big falloff. Down the road we will look back at 2018 and 2019 and say those were decent years.”
At the end of 2017, credit unions had about 30 percent of the auto lending market, up 22 percent from a decade earlier, Schenk said. Credit unions are able to generally price loans lower than banks, potentially saving customers hundreds of dollars over the life of a loan, he added.
In 2017, loans from credit unions on new automobiles increased about 13 percent while credit for used vehicles rose about 10 percent from the previous year, Schenk said. That pace has slowed a bit this year. At June 30, new car loans from credit unions rose almost 12 percent and used car loans were up almost 10 percent from a year earlier, Schenk said.
Last year, there were 17.2 million new cars sold, with expectations that 16.9 million will be sold this year and 16.7 million in 2019, said Bob Child, chief operations officer for CU Direct in Ontario, Calif. Although those numbers are declining, car buying is returning to a more normalized rate after hitting record levels, he added.
“Sales will be down, yes, but off the cliff: Absolutely not,” Child said. “The market is expected to hold up well compared to record levels in 2015 and 2016, and near that level in 2017. Through July of 2018 there were still banner sales this year, until some softening began in August and September.”
Where the opportunities are
A year ago, economists were predicting that large numbers of cars coming off leases would cause used vehicle values to plummet. But now the prices of these vehicles are rising, Child said. He expects a “more robust” used car market over the next six to nine months.
The Manheim Used Vehicle Value Index ticked up again in September, marking six months of increases. The index tracks the pricing of more than 5 million used car sales each year.
“People who are turning in their existing cars are getting more money than they would have thought, and they are trading up to a vehicle that is one year or two years old, rather than a new vehicle,” Child said. “That is phenomenal for credit unions, because they do best in the used car space.”
Credit unions could continue to expand on their niches, especially used cars, in the current marketplace, said Peter Vehko, vice president of business development for Integrated Lending Technologies in Salt Lake City. He expects new car loans will remain in control of the in-house lenders at carmakers, and used cars could continue to increase in value as tariffs on some metals increase the cost of producing new vehicles.
“If everything continues as it is, it will be a pretty strong market that is at or near all-time highs. Very robust,” Vehko said. “The new vehicles are so much better than the old vehicles, which really drives sales. Some people have held on to their cars for several years, so they can get into something pretty advanced compared to what they are driving now.”
Dan Chaney, vice president of business development for Sync1 Systems, a credit union service organization based in Austin, Texas, said he sees a trend of consumers refinancing their loans. He knows of two credit unions refinancing car loans that are seeing dealerships tack on more add ons for products like extended warranties and service contracts for oil changes.
“What is happening is the buyer gets home and wants to go find a better deal,” Chaney said. “The credit unions we talk to are telling horror stories about $1,300 service contracts for three years of oil changes. The credit unions are buying it out, which is not lucrative, but they are making a little money and are certainly helping the members.”
Challenges loom
But there are some expected headwinds to auto lending, experts said. To deal with these challenges, credit unions will need to get more adaptive, Chaney said.
For one, institutions need to be aware of a new form of fraud known as “profile grooming,” Chaney said. Criminals spend months, if not years, building an identity that can be sold for a much larger payday than simply a stolen Social Security number.
“The consensus is small players need to make sure they do onboarding correctly and look for fraud,” Chaney added. “Otherwise they can lose money. If a credit union buys out a deal, they need to make sure it is profitable for them.”
There are also changing preferences of younger Americans that could affect the car buying market, Schenk said. There has been a decline in the percentage of younger people having driver’s licenses from 1983 to 2014, according to a study from the University of Michigan Transportation Research Institute. In 2014, roughly 77 percent of 20 to 24 years old had driver’s licenses, down from almost 92 percent in 1983, according to the study.
Younger members may also have different expectations about the car buying experience than baby boomers. In two years, car buying by millennials and Gen Xers is projected to exceed that of baby boomers.
“No longer will car buyers walk into the branch to do auto finance,” Child said. “Credit unions need an online application.”
Rising interest rates could hurt auto sales. The Federal Reserve has raised rates six times in 18 months, with one more increase expected this year and three more next year, Child said. Every point that interest rates rise could add up to $1,000 to a five-year loan, he added.
A recession could be on the horizon in 2020 as well, Child warned. So far auto delinquencies have held up. Auto loans and leases 30 days past due at credit unions fell to 1.18% in the second quarter, down 9 basis points from a year earlier, according to Experian.
Car sales tend to be a leading indicator of a recession with independent car dealers being the most vulnerable as economic conditions worsen due to the cost of floor planning inventory. CU Direct looks at several factors, including the volumes on its platform, consumer debt levels and the loan-to-value numbers on loans to gauge the health of the auto market.
“If used car values are softening and we see more people underwater on their cars, that is a problem,” Child said. “But current used car values are good. We also look at the number of auto dealers going out of business, and there is a little bit of an uptick – which is a caution flag.”
