SAN ANTONIO—Credit unions are being urged to focus their high beams on a combination of trends that will affect auto lending volume and profitability during 2017.
Mark Hein, CEO of SWBC's Financial Institution Group, is urging CUs to prepare to make some adjustments.
“Currently, things look good for auto lenders, at least on the surface,” said Hein. “Consumers are borrowing and they're borrowing large sums of cash for their vehicles.”
Hein pointed to the latest Experian State of the Automotive Finance Market report, which shows consumers have borrowed more than $1 billion for their auto loans as of Q1 2016, up from $905 million one year earlier.
“The economy has improved from the dark days of the Great Recession, and both new and used auto lending is up,” said Hein. “However, it's no secret that competition among auto lenders is strong, driving interest rates lower and lower, creating razor-thin margins for lenders.”
Competitors Changing
Hein emphasized that the auto lending competitors no longer are simply credit unions, banks, and dealers. They are also insurance companies, “buy here, pay here” car lots, and online retailers.
“All this makes auto lending much more competitive for credit unions,” said Hein.
Not only are new competitors threatening, but consumers’ car-buying and car-ownership behaviors are changing, noted Hein. He explained that at the same time consumers are spending more on their cars—the average new loan amount in Q1 2016 was $30,032 vs. $28,711 in Q1 2015—they're also keeping their vehicles for longer periods of time.
Hein said that according to CNBC, in 2006 car owners traded in their vehicles after 4.3 years. By 2015, the average car ownership period jumped to 6.5 years. He noted that used car values have been sliding at a faster rate and that to keep pace with higher loan amounts, terms are getting longer.
Mark Hein
“What does this mean for lenders? In my opinion, these trends of reduced used car prices and longer loan terms that have been decimating the GAP market for the last 18 months, causing extremely high losses, will continue,” said Hein. “This cost will ultimately flow down to lenders and dealers. Likewise, with consumers staying in their vehicles for extended periods of time, vehicle repair costs will inevitably follow, causing deferred maintenance situations that can lead to overly depreciated assets.”
Hein said that as 2017 approaches that no lender has a crystal ball to show just how much risk to take on, where to make technology investments, or how much staff to keep on hand.
“2017 is a big mystery. No one knows with certainty how the results of the presidential election will impact the economy—which, of course, could potentially have a ripple effect on jobs, interest rates, discretionary income,” said Hein, pointing to other factors such as regulatory pressures and gas prices that will impact the economy and credit unions.
Can't Ignore Challenges
“Looking forward to 2017, while I’m hopeful about many things, it’s hard to ignore the challenges ahead,” said Hein. “In general, my mentality is, expect the unexpected. All we can do is be prepared and diligent, find creative and efficient ways to reduce risk and generate income, keep our members and their needs top of mind, and prepare ourselves to quickly react to however the chips may fall.”
Hein added that SWBC’s free ebook, Stand Out from the Auto Lending Crowd, helps credit unions find creative ways to stand out in the competitive auto lending market.