By Chris Harper, Senior Director, Membership | Filene Research Institute
Across the credit union system, auto loan growth has flattened in recent years. Consumer preferences, economic conditions, competition, and technology has been shifting since long before the start of the COVID-19 pandemic. Even under normal conditions, these changes are nothing to ignore, especially when vehicle financing through auto loans makes up a significant fraction of credit unions’ loan portfolios. But what does a flattened market and a shifting environment added on top of a life-changing pandemic mean for credit unions when it comes to their auto lending business?
While I can’t predict the future, as much as I wish I could (hello, lottery tickets!), I can tell you from my years of experience working in credit union, auto lending, and technology fields what the trends I’m seeing are pointing toward, what Filene’s research on auto loan trends and challenges are projecting for the impact to the industry, and what you should be planning to do about it.
First, this goes without saying, but I want to be very clear: a solid understanding of current auto trends has never been more important. In addition to auto loans making up a significant portion of credit unions’ loan portfolios, a robust auto loan portfolio offers an asset that allows your credit union to be responsive to the interest rate market without the long-term risk inherent in the mortgage space.
The average auto loan stays on the books for just under 39 months ensuring the ability to constantly refresh these assets with new ones at current market rates. We are coming off two of the strongest auto sales months in recent history (April and May 2021), and new car sales are trending close to 2019—or pre-pandemic—levels (16.7M vs 17.0M).1
A major indicator of overall economic health, as you may know, is new car sales. In 2020, this dropped to 14.7 million sales vs. 17.0 million in 2019. Overall auto sales were down 14.6% in 2020 because of COVID-19. This compares to only a 9.9% drop in retail sales.2
Due to factory closings during the pandemic, inventory levels are extremely low. New cars are down 59% from 2019 levels, while used inventories are down a more modest 14%.3 These tight inventories are driving up retail prices in both segments. Credit unions need to be responsive to loan requests that may exceed existing loan policy guidelines in the near term.
To date in 2021, we are seeing a drop off in zero-percent offerings from the manufacturers (down to 6.7% of new financed vehicles from a high of 21% at the end of 2020).4 This makes for a more competitive landscape in which credit unions have the chance to thrive in the auto lending game once again. Expect to see this trend continue until manufacturers rebuild new inventory levels.
This supports one of the key trends and patterns surfaced in Filene’s recent report Auto Loans and Credit Unions: Trends, Challenges, and Projections (filene.org/531), indicating that credit union auto loan growth will slowly return to the long-term average of 6% (4% adjusted for inflation).5
Another reality to call out is this: electric vehicles are here to stay. In the first quarter of 2021, electric vehicle sales grew 44.8% year over year and accounted for 7.8% of all new vehicle sales.6
As of Q4 2020, leasing made up over a quarter of all new vehicle sales.7 Exploring a lease program offers advantages to your membership while also ensuring a consistent rate of return.
After a slight drop in sales in 2020 (2.6%) motorcycle sales have seen a resurgence, up 33% in Q1 20218, which leads me to…
You don’t need me to tell you this: credit unions have lived and breathed the very real need to instantly adapt into providing a digital-first experience through the past 15+ months, and that is here to stay if you want your organization to be resilient enough to outlast this pandemic and whatever comes next.
Putting your members first and centering their needs at the heart of your strategy will always send you down a successful path when creating new strategies. Find ways to make it a win-win for your business and the member.
Despite the short-term disruption of COVID-19, we expect auto loans to remain a significant component of credit union loan portfolios over the medium term and for the foreseeable future. Credit unions should use these implications and trends to prepare for a future where auto loans and related services truly advance member well-being, improve members’ transportation options, attract new members, and form lasting, meaningful member relationships—all while diversifying loan portfolios.
1 J.D. Power and LMC Automotive U.S. Automotive Forecast, May 2021.
2 NADA, “NADA Issues Analysis of 2020 Auto Sales, 2021 Sales Forecast,” Jan. 12, 2021. 3, 4 Cox Automotive, “Cox Automotive Auto Market Report: June 8,” June 8, 2021.
5 Filene Research Institute, “Auto Loans and Credit Unions: Trends, Challenges, and Projections,” Jan. 26, 2021.
6 Cox Automotive, “Sales of Electrified Vehicles Jump 81% in the First Quarter of 2021,” April 19, 2021.
7 Experian, “U.S. Auto Debt Grows to Record High Despite Pandemic,” April 12, 2021.
8 McD MotorCycles Data, “United States 2021. Motorcycles market posted a spectacular Q1 (+33%),” May 11, 2021.
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