A surge in auto lending in the second quarter has given U.S. credit unions their biggest slice of the vehicle lending pie in the past five years.
Recent data from the National Credit Union Administration showed that auto loans increased $58.7 billion, or 15.1% year over year, to $447.6 billion. Used-auto loans rose $43.2 billion, or 17.4%, to $291.0 billion, and new-auto loans rose $15.5 billion, or 11.0%, to $156.5 billion.
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The secret to their success is offering low rates and underpricing the market, said John Toohig, head of whole loan trading at Raymond James.
"We're in this really weird spot right now where [credit unions] have a lot of cash on hand and they've been using it to make loans at ultra-low rates," Toohig said. "We're still seeing them make 1%, 2% or 3% auto loans whereas the rest of the market is at 5.5% or 6.5%."
And that increase in auto lending may be coming at the expense of banks.
Experian said banks' share of the market fell from 30.3% a year ago to 27.9% in 2022. The remainder of the market is owned by the auto companies themselves, as well as fintechs.
One of the credit unions seeing increased auto loan demand is Truliant Federal Credit Union, a $4 billion-asset lender in Winston-Salem, North Carolina. Truliant had $1.1 billion in auto loans at the end of the second quarter, up from roughly $1 billion at the same point last year, plus another $620 million in indirect auto loans.
Chris Murray, Truliant's chief member experience officer, said auto loan demand has been strong, particularly through the indirect lending channel, which are made through a dealership rather than through the lender's direct channels.
"And we expect it to remain strong," Murray said. "We are leveraging our strength in indirect [lending] and making investments in technology, processes and people in order to scale up our capabilities to generate more loans through the channel."
Most of the new business has been in used-auto loans, and Murray said funding loans fast is crucial when dealing with independent used-car dealerships.
"They rely on our fast funding, especially in today's market where they have to compete heavily to get inventory at auction. Cash is king for them; the faster they get funded, the faster they can get the next car on the lot to sell," Murray said.
And volumes have not slowed despite Truliant steadily raising rates.
Other credit unions will have to pump the brakes on auto lending soon, asin some cases they have nearly a negative net interest margin on auto loans, Toohig said. "They're going to have to raise their rates first just to slow down lending but also to take a look at the profitability of the portfolio," he said.
Curtis Onofri, chief lending officer at Pathways Financial Credit Union, a $592 million-asset lender in Columbus, Ohio, said auto-lending growth has been fueled both by new purchases and refinancing.
There are several factors at work causing the rapid growth in auto lending — including increased prices, strong marketing, trailing rate increases and better inventory, Onofri said.
"Prices in the new and used market have increased considerably over the past couple of years. This increase is translating into larger average loan amounts," he said.
For Pathways, the average auto loan has risen $2,775 year over year, which represents an 11.7% increase in average loans outstanding.
Hanscom Federal Credit Union, a $1.9 billion-asset lender in Massachusetts, had $350 million in auto loans at the end of the second quarter plus another $231 million in indirect auto loans.
Dan Picard, Hanscom's senior vice president of consumer lending and collections, said that with the lack of incentives at automobile dealerships due to limited inventory, auto manufacturers' financing arms are not offering appealing financing options.
"As a result, the lending opportunities for credit unions has continued to be steady even in this rising rate environment," he said.
Toohig said those loans are also driving up credit union membership, but the question is whether the credit unions can then cross-sell those consumers on other products like credit cards or mortgages.
It's easier said than done, Toohig said. "Historically, that number [of cross-sales] is incredibly low."
