Article

Used Cars Will Drive 2019 Auto Lending

used cars for sale in a lot
By Bob Child

6 minutes

This is good news for credit unions that watch their underwriting and have strong dealer relationships.

Auto sales are still going strong in the U.S., with CU Direct and leading economists predicting a year-end total of 17 million vehicles sold, just slightly less than 2017 figures. 

Strong auto sales have meant strong loan demand for credit unions this year. As of September 30, the CUDL platform had funded 1,045,840 loans in 2018, marking a 9.1 percent increase year-to-date (September 2018). Our 1,100 credit union partners on the CUDL lending platform, as an aggregate, remain the largest lender in the automotive marketplace for the second year in a row, according to AutoCount

To underscore how strong credit union auto lending has been this year, No. 2 ranked lender, Ally, experienced a 7.5 percent increase, while three of the nation’s top 10 auto lenders Capital One Auto Finance (No. 3), Chase Auto Finance (No. 5) and Wells Fargo Dealer Services (No. 9) have all experienced loan decreases of 8.4 percent, 9.3 percent and 41.7 percent respectively through September, according to AutoCount. That’s a big win for credit unions.  

CUNA Mutual Group, a CUESolutions provider based in Madison, Wis., reported 11.7 percent annualized growth for credit union new auto loan balances as of Aug. 31, for a total of $114.3 billion outstanding. Used auto loans have grown at an annualized rate of 10.3 percent as of Aug. 31, for a total of $221.5 billion outstanding.

While it may appear that new and used auto sales present similar opportunities for credit unions through the end of the year and into 2019, that is not the case. Used auto loans—the bread of butter of credit unions, comprising about 70 percent of CU auto loan portfolios—will accelerate loan growth.

Strong Used Car Market Good for Credit Unions

To drive home the current and future success of used auto lending this year, we must back up to the predictions made one year ago. Experts forecasted a surplus of used cars due to expiring leases and lower demand overall in the auto market. Those economic forces would lower the value and prices of used cars, they said, putting the brakes on used auto loan growth. 

That didn’t happen for a number of reasons.

First, the economy remained robust during 2018 and has kept consumer demand almost on par with 2017, despite the auto market being virtually saturated. Edmunds Manager of Industry Analysis Jeremy Acevedo told Rubber & Plastics News in July that the U.S. had nearly 1.3 registered vehicles for every licensed driver.

Then hurricanes Florence and Michael hit, destroying cars in severe flooding with Florence and intense winds with Michael. We know Florence destroyed 40,000 vehicles and impacted 2.5 million more. It’s too soon to report how many vehicles were lost to Michael, but in communities that took a direct hit, 100 percent of homes and vehicles were damaged in some way, according to The Washington Post.

Cars damaged by Florence and Michael, along with the 700,000 destroyed last year in Hurricanes Harvey and Irma, increased demand for used cars so much that consumers purchased all the surplus vehicles and actually created more demand than available units. 

Additionally, because the year-over-year price of new cars has risen along with interest rates, many consumers who had cars destroyed in storms this year couldn’t afford to replace them with new cars, further increasing used auto demand. Even consumers who didn’t suffer losses to natural disasters are selecting used cars over new, due to waning availability of 0 percent manufacturer financing deals and fewer incentives. These consumers, many of whom have good credit, but want to keep monthly payments low, are opting for 2017 or 2018 models over new 2019 models. According to Edmunds, the average new car monthly payment hit an all-time high of $531 in August.

Potential tariffs by the Trump administration on new car imports, as well as on steel and aluminum used to make cars in the U.S., have also been a factor in the price and sales of used cars, according to an Aug. 18 article by CNBC. It reported that as of July 31, the Manheim Used Vehicle Value Index was at its highest point since it first began tracking used car sales in 1995. That’s particularly significant because July is historically a slow month for used cars. 

That’s pushed up the value of used cars, which is more good news for credit union lending. According to the Manheim index, three-year-old vehicles are now worth 4.8 percent more than they would have under traditional depreciation, and more than 7 percent more than predicted one year ago. Used cars are also bringing greater trade in values.

Loan Quality Remains High

Used auto loans booked this year have been especially strong. According to Experian, the average used car buyer’s FICO score is 655, up from 652 last year and 645 in 2016. The FICO scores of franchise used car buyers (who purchase a used car from a new car dealer) were even better, at an average of 680 this year compared to 673 last year. Credit union delinquencies continue to be lower than those of banks, having dropped slightly year-over-year between June 2017 and June 2018 from .74 percent to .67 percent, while bank delinquencies have dropped from 1.97 percent to 1.76 percent over the same period, according to Callahan.   

But Watch Your Underwriting

However, credit unions must still be selective in their loan decisioning, especially when it comes to longer loan terms. According to Edmunds, the most common loan term for a used car in 2018 has been 72 months. That’s risky, because the average used car ownership is only 66 months. Further, economists are predicting a recession in 2020, which could drive up delinquencies.

Strong Dealer Relations are Key 

Credit unions gained market share when banks and finance companies pulled back on lending activity due to delinquencies and charge offs. However, banks and finance companies re-entered the auto loan market in 2018, spawning increased loan competition. 

Credit unions must leverage technology to continuously improve the efficiency and consistency of their loan decisioning, processing and funding. Every dealer wants to hear that you’re going to consistently underwrite loans and make that process as quick as possible. 

To serve members of all means, it’s important for credit unions to work with independent auto dealers. However, as the economy tightens up and interest rates continue to rise, the odds increase that some of those independent dealers will go out of business. As credit unions grow their used book of business, it’s important that loan processors have all necessary paperwork in place at funding when working with independent dealers. 

Auto lending is one of the cores of what credit unions do, and they’ve continued to have a strong marketplace presence, expanding their auto portfolios. When it comes to auto lending, credit unions are the only finance sector that has exhibited continued growth and grown portfolios over the last couple years.

As a result, credit unions are seizing the opportunity in auto lending, and we don’t anticipate that tapering off.

Credit unions are well positioned to drive away with another strong year of auto lending during the last weeks of 2018 and into 2019. Capitalizing on strong used car sales, rising interest rates and good loan quality will ensure credit unions serve more members than ever and build their financial cooperatives with strong margins and revenue.

Bob Child is COO of CUES Supplier member CU Direct, Ontario, California.

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