Auto lending: ‘Well positioned for 2025’

The big story for credit unions during the second half of 2024 will be a greater focus on used-auto lending due to aggressive subvention by captive finance companies and fewer loan opportunities elsewhere.

So says Bob Child, chief operating officer at Origence.

“We’re predicting credit unions will make used-auto lending a key focus in the second half of the year,” he says. “However, they’ll need to focus on yield and not just buy market share.”

In this interview, Child examines industry trends, consumers’ balance sheets, the rise of artificial intelligence (AI) and fraud, and more.

America’s Credit Unions: How is auto lending shaping up in 2024?

Bob Child: We’ve shifted the pendulum from one side to another. If you think back to 2022, which was one of the best years for credit unions and auto lending, it was a unique time when people were buying cars at or above MSRP.

Back then, coming off COVID, the dealers had no inventory. Today, car dealers have up to 60 days of inventory on average. This has spurred a buyer's market, and cars have all kinds of incentives.

There's more inventory, so dealers are more motivated to sell than before. However, interest rates are still high. This is driving a couple other phenomenon, including a resurgence of subvented interest rates from the captives. So, 2% interest rates are dominating the market, making it tough for credit unions and banks to compete and win over new-car loan volume.

The captives have grabbed a ton of market share on new-auto financing and a ton of lease business. When interest rates rise, you see an increase in leases. That’s another reason it's not a friendly market for credit unions to pick up market share or volume on new-car loans.

Credit unions are getting more aggressive on the used-car side, and are rebuilding momentum. It’s going to be the story for credit unions in the second half of 2024.

What I mean by that is, mortgage volumes are pretty much nil, credit cards are maxing out, and commercial loans aren’t attractive right now. So, we’re predicting credit unions will make used-auto lending a key focus in the second half of the year.

Q: Will the captives’ dominance in new-auto financing continue for the rest of the year?

A: Yes. Given the number of vehicles they've got to move, we’ll see more subvention and lease promotions on the new-car side than ever before. That probably will last the rest of the year.

If they shift over to manufacturer incentives, however, that would be attractive to credit unions. This just brings down the price of the car.

Another possibility is that captives could open up subvention programs to other lenders. That would basically mean that credit unions would charge a 2% rate, but the captive finance company would reimburse the credit union to make it equivalent to a 7% rate.

Part of the reason for the shift to used vehicles is the increasing number of consumers who have negative equity on their cars. Consumers’ debt-to-income ratios are rising, and they’re starting to max out their credit cards. Middle America is getting squeezed from inflation at the moment.

Q: So, the consumer balance sheet is suffering somewhat.

A: Yes, big time. On average, consumers hold their vehicles and their loans for 2.5 years. Many bought vehicles above MSRP in 2022. Fast forward 2.5 years, and people are looking for that next vehicle. Some will roll that negative equity into the new car, and some of those people will sit on the sidelines until 2025.

Q: What other trends are affecting auto lenders?

A: I think interest rates will remain high for the rest of the year. The other thing to watch is the demand for electric vehicles (EVs), and whether any of the manufacturers will start adding large discounts to move more of those cars.

If the pent-up demand for EVs has run out, manufacturers will need to make it worthwhile for consumers to purchase them. There’s a lot of price pressure on EVs, and we’ll see EV pricing come down. We might see more credit unions doing EV loans.

Q: How is your partnership with Tesla going?

A: It’s been good. We have 19 credit unions in that program right now, and we’ve done a little over $300 million in loans so far this year with another $200 million in the pipeline. People who purchase Teslas don't take delivery for a few weeks, so there’s a pipeline effect. We’re in all Tesla states except for New York right now.

We’re in talks with them about solar loans and some other programs. We’re looking forward to seeing that relationship continue to expand.

It becomes a great launch pad for demonstrating how credit unions can be a force for large auto manufacturers. Manufacturers look at credit unions kind of as a niche lender, but when you aggregate them together, you see that we have the power of a Chase or a Wells Fargo.

We’ve gotten favorable feedback from the leadership all the way up the chain at Tesla. I think we've shocked them that credit unions can decision loans so fast and get payments to a manufacturer on a timely basis.

Another trend is the use of AI to accelerate loan decision making and find opportunities to make more loans—almost like a secondary decision score, where the borrower’s primary score comes back and the person is on the bubble. Then, AI comes in and says, “Yes, you should make that loan.”

On the challenging side, there’s the uptick in fraud. The amount of fraudulent applications has increased significantly at credit unions. Whereas a credit union may have had one fraud prevention tool, they’re moving to three or more fraud tools, all with a different specialty. We’re applying these fraud tools to reduce the amount of fraud that’s coming through.

Q: Is there anything else you'd like to add?

A: There's going to be great opportunity for auto lending. Our advisory group of credit union leaders said they anticipate that their auto lending would increase 5% to 10% in the second half of 2024. Basically, they're looking for opportunities to enhance yield. They're going to be opportunistic and pick up loan volume where they can.

Looking at where credit unions will land at the end of the year, I think we’ll see 3% to 7% loan volume growth on an aggregated basis. We’ll still lose market share compared to the banks and captives, but that's okay. From a capital perspective, this will allow credit unions to be stronger going into 2025. We’ll see small gains this year, but we’ll be well positioned for 2025.