CU Auto Lending May Bring IRR Gods’ Wrath
That two-door hatchback with the spiffy, cushy interior bought back in 2003 may be on its last wheels.
And if industry data offers any proof, more drivers are turning in their clunkers for newer models. That transition is helping to fuel car loan growth for credit unions and other lenders.
“Consumers have to replace vehicles at some point,” said Dave Colby, chief economist at CUNA Mutual Group. “Yes, the vehicle fleet has aged, but stronger new vehicle sales should help stabilize if not bring down the average age of 10.8 years noted by Polk,” a tracker of automotive industry data.
Equifax reported that the continued demand for new cars from consumers ready to replace their 10-year old vehicles, on average, has helped auto loans grow to $207 billion.
Colby said the good news is new light-vehicle sales on an annualized rate appear to be holding above the 14.5 million unit rate.
“I believe at and above this level, manufacturers back off financing. This is evident in recent credit union new vehicle lending activity,” Colby said.
Year over year through March, the new vehicle portfolio at credit union was up 11.2%, Colby noted. At this time last year, contraction was 4.0%.
“Pent up demand is certainly contributing to higher vehicle sales as consumers look to replace their aging vehicles. I believe that it is lending, however, that is driving sales,” said Jeff Martin, president of Autoland Inc., a Chatsworth, Calif.-based auto buying CUSO that serves more than 200 credit unions nationwide.
Colby acknowledged not everyone is buying brand new cars. With generous, transferable warranties, many used vehicles are a very good deal, he said. Used vehicle loan growth is up 9.1% year over year, and this has accounted for 33% of all credit union loan growth since March 2012.
Still, for those consumers that want the latest model, some lenders are meeting their requests by providing longer than usual loan terms. According to Experian Information Solutions Inc., the average new car loan was 65 months during the fourth quarter of 2012. Seventeen percent of new car loans were 73 and 84 months in the first quarter of this year, the Wall Street Journal recently reported, adding a few extended out to 97 months.
Martin said the majority of Autoland’s partners offer maximum terms of up to 72 months and perhaps to 84 months at times, if the member is creditworthy. Terms up to 97 months are still rare, he added.
“Low rates have made vehicles more affordable, and while our partners are always looking to generate more quality auto loans for their pipeline, I have seen little evidence of a trend towards the availability of terms greater than 72 months or an occasional 84 months,” Martin said.
Credit unions that offer these longer durations with a fixed rate may make them vulnerable to additional interest rate risk, Colby cautioned.
“Loans will need to be fairly priced based on current and expected cost-of-funds as well as competitive market conditions,” he explained. “Don’t compete directly with a financing arm that is getting their margin from sources other than spread, for instance, zero percent for 84 months.”
Indeed, rates in general are about as low in the prime market as they can be, Martin said. As a result, some lenders have begun to get creative with the availability of above average finance terms to further lower the borrower’s monthly payment.
“My concern regarding longer finance terms is that the collateral will depreciate at a faster rate than the balance of the loan, which would lead not only to a lengthy negative equity position for the consumer, but also to higher loss severity for the credit union in the event of repossession, Martin said.
Experian Automotive said automotive loan delinquency and repossession rates increased in the first quarter. According to its State of Automotive Finance report released on May 14, 30-day auto loan delinquencies rose 1.3%, 60-day delinquencies increased 12.4% and repossessions rose 16.9% when compared with the previous year.
“Obviously, we never want to see a rise in delinquencies or repossessions, but when you compare the current findings with previous years, they are still lower than the recession-level rates,” said Melinda Zabritski, Experian’s senior director of automotive credit, in a statement.
Moving forward, lenders should start to see more increases as some of the subprime loans coming onto the books begin to deteriorate, Zabritski said. However, one thing most lenders will agree upon is that today’s subprime borrower is less delinquent than those in the past, she added.
Meanwhile, Martin said another concern for longer-term loans would be on the qualification and repayment side. A creditworthy member with a modest income who is more aware of their budget and is payment-driven might consider a longer loan term to afford their vehicle, he explained. Any potential financial challenges for this type of member could be a tilting point for them to maintain on-time repayment.
The fastest growing segment is in non/subprime lending category, Martin said, adding this expansion is really driven by a need for higher loan volume rather than quality.
“From a perspective of managing long-term asset risk, it is hard to see credit unions offering either extended loan terms above 72 months and/or extending credit to deep subprime borrowers,” Martin said.
“If a credit union is considering expanded terms, I would recommend that they proceed thoughtfully by evaluating interest rate risk and other risk factors, prior to expanding into that realm,” he offered.