By Ray Birch
SANTA MONICA, Calif. – Despite predictions new car sales in 2021 will be down again from pre-pandemic levels, TrueCar is urging credit unions to prepare for a solid auto lending year—but the forecast also comes with a warning about a potentially big pothole.
The automotive pricing and information company is warning credit unions to be wary of rising car prices.
“Sales now are right in line with where they've traditionally been, which is a great thing,” said Nick Woolard, director of OEM analytics at TrueCar. “It's going to be another strong year, as is normal—with the exception of 2020—for lenders.”
Woolard said TrueCar is expecting new auto sales units to come in around 16 million this year, an increase of 10% over 2020.
“Auto sales finished the year very strong,” Woolard continued. “Now, if I put myself in back my shoes during March and April, I certainly would not have expected that, and expected the economy to recover at that speed that is has.”
Digging into the data, Woolard said the 16-million-unit prediction is actually a very strong number.
Good Time for Lending
“It is, given where sales units ended last year, and 17 million units is traditionally where we have been in very good years,” said Woolard. “The gap between 16 million that we see for this year and 17 million is largely being driven by an expected drop-off in fleet sales. The average lender and the average credit union do not play in that space. The retail space, then, is expected to be as strong as ever in 2021.”
Woolard added it is a good time to be lending with costs of funds expected to remain low and the Federal Reserve signaling it is going to keep rates low, which will stimulate new car sales.
What should also continue to spur new car sales, into 2022 as well, are consumers’ financial situations and behaviors changing due to the pandemic, Woolard said.
“Your car is almost a safe space right now,” said Woolard. “People really aren’t spending a lot of money on entertainment and dining, not traveling, and while this is not indicative of all consumers, household balances are likely up. Therefore, there is money for new cars. The upward trend for new car sales we saw in Q4 will likely continue.”
A Big Pothole
But a potentially big pothole is the rising price of new cars. TrueCar recently reported the trend towards more expensive vehicles will continue in 2021. Average transaction prices are projected to increase 3.1% year over year to $37,925. Woolard acknowledged that soaring sticker prices is challenging borrowers’ ability to afford monthly payments.
Black Book, too, recently reported that a shortage in the supply of microchips for increasingly sophisticated technology in cars will result in a production slowdown for the early months of the year.
What is driving up the price of new vehicles are automakers loading up cars with new technology and features, a trend Woolard does not see slowing. Electric vehicles, too, are driving up costs. He noted the new GMC Hummer starts at over $100,000. Consumers, too, have drifted back to buying larger vehicles, and away from compact cars.
“Most credit unions don't really have a high amount of leasing, and we've recently seen a slight shift away from leasing versus historical averages,” said Woolard. “Leasing levels have been a little bit below where they’ve normally been, so there might be an opportunity for credit unions to increase their share of the leasing pie.”
Where to Pay Attention
He also said lenders will have to play closer attention this year to how they structure loans, suggesting that larger down payments could be required to keep payments affordable.
Woolard acknowledged loan terms have been steadily getting longer in the last several years as borrowers and lenders try to keep monthly payments down. He noted, too, there was a spike in auto loan terms last April when the automakers flooded the market with 0% offers.
“In April we saw a spike towards 84-month financing,” said Woolard. “At the onset of the pandemic a lot of the automakers offered 0% for 84 months, which is a pretty expensive loan to put out. The take rate was very high on those deals. We saw 84 months go from sub 10% of all transactions to almost 20%. Since then, terms have come back down and 84 months now represents about 10% of all transactions.”
Potential ‘Surge’
The auto market has shown it is not affected as badly as some of the other industries during the pandemic, pointed out Woolard. And how it rebounded as the economy reopened suggests when the pandemic is over there could be an even greater car-buying surge, Woolard said.
“Generally speaking there's a lot of tailwinds going into the year for auto lending, which will lead to good things,” Woolard said.