This story is part of Credit Union Journal’s ongoing special report on auto lending, which will appear throughout the month of May. More coverage can be found
Electronic vehicles (EVs) account for less than 2% of the total U.S. auto market, but a growing number of credit unions are making efforts to make them a more prominent part of their institution’s loan portfolio.
Credit unions have long made auto lending a core component of their business model, and volume has surged in recent years. With purchases slowing, more and more financial institutions are looking to compensate for those declines. But with higher-than-normal costs and a faster depreciation, EVs are far from a sure thing.
According to InsideEVs, 361,307 electric vehicles were sold in the US in 2018, up from 199,826 in 2017 and 158,614 in 2016. Steven Loveday, director of communications, attributed the huge rise in 2018 to the popularity of the Tesla Model 3. InsideEVs estimates all-electric, zero-emission vehicles now make up about 1.6% of the total U.S. auto market.
JetStream Federal Credit Union in Miami Lakes, Fla. has offered EV loans since 2012, promoting the product online and in mailers and newsletters, and offering a 0.50% APR discount on all approved loans.
Rick Perez, VP of lending at the $201 million-asset institution, said EVs are part of the CU’s “green loan” program, which emphasizes fuel-efficient cars and environmentally friendly home modifications. JetStream began offering the loans as the result of member demand, and during the first quarter of 2019 closed 10 EV loans for a total of $486,300 – about 0.7% of the credit union’s total auto loan portfolio.
Hudson River Financial FCU in Mohegan Lake N.Y. offers loans for electric cars as part of its overall auto loan portfolio. According to Chis Powers, VP and COO at the $61 million-asset institution, the last two months have seen about $120,000 in loans for electric cars, or about 8% of all auto loans funded during that time.
Jim Whipp, president and CEO of Baltimore-based Five Star of Maryland FCU, said the $53 million-asset shop launched an EV lending program in November 2018 as a way to offer something unique to members.
“EVs have been an area of the auto market that has grown in popularity in recent years,” he said.
Only a “handful of members” have taken out EV loans so far, and the credit union has priced these loans below normal auto loans as a way to get members’ attention. While regular car loans range from 3.24% to 4.24% APR, for the rest of 2019 Five Star is offering EVs at 1.99% for up to 72 months.
“We’ll re-examine the pricing and program in the fourth quarter and determine what changes should be made for 2020,” said Whipp.
Faster (depreciating) cars
Andrew Ivankovich, SVP-general manager of digital lending products at Fiserv, cautioned that EV loans come with some unusual risks.
“The loan-to-value ratio that lending officers often rely on to make decisions is hard to come by for an electric vehicle,” he said. “What this boils down to is that it’s difficult to tell for sure if that new, high-end electric vehicle is going to hold its value as well as something more familiar, like a Toyota Corolla, should the loan default in three to five years.”
Ivankovich added that the lending industry is still working to understand how tech-based factors like battery deprecation impact the risk equation for EV loans.
EVs also depreciate in value faster than traditional cars and trucks. According to a report from automotive research firm iSeeCars.com, electric vehicles and luxury sedans show the highest rates of depreciation, while SUVs and trucks are the best at retaining their value. For example, the Nissan Leaf, an electric car, depreciated, on average, by 71.7% after five years, while a Jeep Wrangler Unlimited only lost an average of 27.3% of its value over five years.
The average depreciation for all vehicles after five years is 50.2%.
“There is more uncertainty about future values of electric vehicles since the rate of depreciation is still unpredictable and the re-sale market is not as large,” said Five Star’s Whipp.
EVs also tend to be somewhat more expensive than more traditional cars. While a small number of EVs can be as pricey as $180,000, EnergySage reported EV prices in 2018 ranging from $22,490 for a Nissan Leaf to $72,000 for Tesla Model X.
The IRS also offers tax credits for EV purchases ranging from $2,500 to $7,500 per new purchase.
Demand and risk
While financial institutions make traditional auto loans to buyers of all ages, many sources for this story said the members who come to their credit unions for EV loans tend to be older, more affluent and have higher credit scores.
Fiserv’s Ivankovich warned that since electric vehicles have not been around very long, pricing and underwriting these loans is an evolving process. For one thing, there isn’t a lot of data for lending officers to base their decisions on.
Although there has been a good amount of consumer attention being paid to EVs, Ivankovich added, it will take time to develop established pricing and other best practices.
At least one lender, however, predicted that while EVs are a growing market, there may be a ceiling to how much of the auto lending portfolio they dominate.
Laurie Fielder, the VGreen program director at the $796 million-asset Vermont State Employees Credit Union of Montpelier, Vt., said her credit union has closed 647 EV loans since it began offering the product in 2012 when members asked for a discounted financing option for “green vehicles.” The credit union currently has about $10 million in EV loans on the books out of about $93 million in vehicle loans.
But Fiedler said demand has stayed relatively low because of high prices. Vermonters, she said, need affordable, practical vehicles that can handle snow, mud, ruts, etc. There are also concerns about the ability to find electrical charging stations in remote locations.
Still, for those that do want them, VSECU uses its normal underwriting process since those loans are secured by the vehicle itself.
The same goes for Hudson River Financial FCU’s Powers. “They’re secured by the vehicle, he said. “We consider them the same type of risk as a traditional auto.”
