By Ray Birch
CHICAGO—Even as auto loan portfolios have been declining at credit unions, TransUnion is forecasting those same portfolios could be bulging by the end of this year—but a lot depends on whether the Fed decides to cut rates.
As CUToday.info reported, a recent TruStage Trends Report revealed credit union new auto loan balances fell 1.1% in March, a big drop compared to the 0.6% jump in March 2023.
What is affecting a lot of consumers’ decisions now what it comes to taking on more debt are concerns over one big question, according to Charlie Wise, head of global research at TransUnion.
“Despite the progress that we've seen in bringing down inflation over the last couple of years, inflation continues to be the top concern consumers have around their financial future,” said Wise, citing data from TransUnion’s Q2 2024 Consumer Pulse study. “We've seen 84% of consumers that have inflation in their top three concerns, up from 79% a year ago. So, inflation is coming down, but inflation concerns continue to go up. That's the situation we find ourselves in now.”
Cutting Back on Spending
That situation has consumers ratcheting back spending a bit, as well as eyeing their debt levels, Wise said.
“A lot of consumers struggle to see the difference between inflation, which is the rate of change of prices and prices themselves, and prices of goods today,” observed Wise. “When consumers hear inflation is coming down, many think prices are coming down, too. Instead of paying 12 bucks for lunch I'll go back to paying $8. Well, we know that's not going to happen. While they’re hearing this positive progress regarding inflation, they're still paying a lot more than they're used to for groceries, for gas, for rent…”
The Need for an Anchor
Wise said consumers need to “anchor” themselves to the fact that higher price levels are here to stay.
“The good news is most consumers are making materially more than they did several years ago,” he said. “Consumers are getting ahead but it's the inflation that makes them feel bad, even with the wage gains.”
What’s going to help, Wise said, is when the Fed gets comfortable that inflation is under control and it sees consecutive months of good CPI data.
Charlie Wise
“Then, they may be finally convinced to begin dropping rates,” Wise said. “When interest rates start coming down this is something that's going to affect just about everyone positively.”
Cards Will be First
The first place many consumers will see some relief, said Wise, is in their monthly credit card statements.
“It's going to make carrying that debt a little bit cheaper for people who want to buy a home or refinance their high mortgage rates they may have taken out in the last couple of years,” he said. “And buying a car is going to get a little bit more affordable.”
When rates drop, the stock market should begin to see some even stronger gains, Wise is forecasting.
“All of those consumers who have retirement accounts, maybe some stock investments or other things, they're going to feel better about their situation,” he said.
A Counterbalance
Wise believes all of these improvements in household balance sheets will counterbalance concerns that consumers have with inflation.
“People will say, ‘OK, higher prices are here, but now I’ve got a little more money in my pocket’,” he said.
Wise forecast the Fed may consider cutting rates during its September meeting, a move that has been much anticipated for some time.
“But that is assuming we continue to see positive progress with inflation,” Wise said. “Now, there are other potential shocks to the economy, such as higher oil prices, that could throw things off…But September or October is when I think we might see movement from the Fed.”
Wise noted that in the TransUnion Q2 study, in addition to asking about financial challenges, consumers were asked to share their perspectives on their household finances.
More are Feeling Optimistic
“Over the next year, the majority of consumers (55%) responded that they're optimistic about their situation,” Wise said. “But when you look at that by age segment, the youngest consumers—Gen Z followed by Millennials—those two segments are the most optimistic (65%) about their household finances in the next year.”
Wise contended the strong job market is a key driver when it comes to financial outlook of younger consumers.
“Consumers are saying unemployment is still low, wage gains are real, there's still plenty of jobs out there even if it may not feel like it for everybody…There's lots of jobs out there that are making people feel optimistic that they’re going to be OK,” he said.
Issues are Surfacing
While inflation concerns continue to be the “big beast” in the room, other issues are surfacing, Wise said.
“Housing prices is the second-biggest factor for those younger consumers,” Wise said. “Why? Because if you own a home you know what you're going to pay. Your mortgage is likely set. But if you're a renter and you're still seeing those big rent increases, younger consumers are really concerned about housing prices. That's keeping them up at night. For older consumers interest rates are really a big deal for them.
“There's a lot of older Americans that really like a 5% yield on a savings account,” continued Wise. “It’s almost risk-free money. They feel a lot better than they did back in 2021, when you were getting 25 basis points.”
What Does it All Mean?
So, what do all these consumer perceptions mean for credit unions?
“Credit unions are big in the auto lending space,” Wise reminded. “We have seen an uptick in the number of consumers who are thinking about refinancing their auto loans, waiting for rates to drop. If rates start coming down there could be some real opportunities for consumers that have gotten themselves a five- or six- or seven-year auto loan. Credit unions today should begin putting themselves into a position to take advantage of this opportunity. They should be putting together marketing campaigns, making consumers aware that this option could be a really viable strategy. I think they can attract a lot of lending business and new members this way.”
A Second Opportunity
The other opportunity credit unions need to keep an eye on, added Wise, is mortgage refinancing.
“As you can imagine, mortgage refinancing is going to be a big deal when rates come down. There's more than three million consumers nationwide who have taken out a mortgage since 2022, and have interest rates above 6.5%,” Wise pointed out. “When rates start coming down there's going to be a whole lot of people lining up to refinance those mortgages. Even 50 basis points means a lot for a $300,000, $400,000, $500,000 mortgage. Credit unions should be already making sure members know what rates are available and what refinancing options are available.”