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Does Carmageddon Light the Road Ahead?
Friday, November 18, 2016 6:30 AM

Steven Houle, CFA, Director, Advisory Services, Catalyst Corporate FCU

As Newton’s Law of Gravity dictates, what goes up must eventually come down, and auto sales are no exception. From 2010-2015, American consumers purchased cars at a steadily increasing rate, peaking in November 2015, but purchases have trended lower ever since.

Graph 1

The first graph here illustrates U.S. monthly car sales in millions. The low was 10.12 million units in February 2010, and the high was 18.04 million units in October 2015.

Another concerning trend is the increase in sub-prime auto loans made since 2010 and the corresponding increase in delinquencies. See the second graph. 

Second Graph

What does this mean for credit unions?
Fortunately for credit unions, credit allocations have stayed consistent (see third graphs) and credit unions shouldn’t have any surprising uptick in delinquencies or charge-offs. New loan growth could be challenging, however, and come with higher loan-to-value ratios and longer financing terms.

Third Graph

In the second quarter of 2016, auto leases accounted for 31.4 percent of all new car and truck transactions, up from 26.9 percent a year earlier. Additionally, the average new car loan was $29,880, up nearly 5 percent from the second quarter of 2015 and only $4,000 less than the average new vehicle selling price. And while the dollar amount of loans is up, so is the term length of the loan.

What other market dynamics are affecting auto lending?
The increase in new car sales between 2010 and 2015 will start to create an influx of consumers looking to trade for newer cars. Ordinarily, this wouldn’t be seen as problematic; but as more leased vehicles are returned, the price at which they’re sold will be depressed. Therefore, consumers will potentially receive less money for their trade-in and will have to borrow more money to purchase a new car. It’s simply supply and demand and the cost of depreciation.

There’s another option, though; credit unions can focus on used car loans. Many consumers with excellent credit are opting to buy used cars as a way to control the higher costs, and credit unions will be able to add lower loan-to-value loans with wider spreads.   

Can credit unions mitigate the risks?
The good news is, yes! Credit unions must actively manage the credit risk within their auto portfolio and calculate their net profitability within each of their different pricing tiers. This will ensure they achieve the risk/return paradigm. Credit union leaders can also educate themselves on trends and critical issues facing credit unions.

Understanding these trends—and working with gravity, instead of against it—will position your credit union as new trends continually evolve.

Catalyst Corporate Federal Credit Union is an endorsed business partner of Credit Union Resources, Inc., a wholly owned subsidiary of Cornerstone Credit Union League.