Microchip and other supply chain shortages have cut down on car-financing opportunities for credit unions in recent years — and while there are signs of a turnaround, competition has intensified since prepandemic times.
In addition to competing with large banks, credit unions will have to win potential customers away from online dealers such as Carvana, CarMax and Vroom that remove much of the friction from buying new vehicles.
“It’s definitely more difficult to compete for member loans when larger financial institutions and online banks and lenders have more marketing dollars and brand awareness than we do,” said Jenna Lampson, president and CEO of Pacific Service Credit Union in Concord, California.
The online dealers in particular “have decent inventory, and in some cases more inventory than brick-and-mortar dealers,” Lampson said. “It’s going to be difficult to compete for that business at the point of sale unless we can integrate as a preferred lender.”
Despite these headwinds, things seem to be improving for credit unions. New-car loans at credit unions fell by just $0.4 billion, or 0.3%, to $141.5 billion on a year-over-year basis in the third quarter of 2021, according to the most recent data released by the National Credit Union Administration. A year earlier, new-auto loans fell $5.5 billion, or 3.7%, to $141.9 billion.
Depleted dealer inventories shifted some buyers to used cars in the last few years because those vehicles were available immediately, Lampson said. New cars are taking months to deliver and some orders have been cancelled altogether, she said.
By contrast, used-car loans at credit unions grew by $19.6 billion, or more than 8%, to $256.6 billion in the third quarter of 2021. A year earlier, used auto loans rose $10.1 billion, or 4.4%, to $237 billion.
Buoyed by used-car loans, overall credit union auto lending increased 5.1% year over year in the third quarter of 2021 to $398 billion.
The $1.4 billion-asset Pacific Service Credit Union had nearly $98 million in new-car loans outstanding at the end of the third quarter, versus $112 million a year earlier.
Matt Selke, CEO of the $89 million-asset Pinnacle Credit Union in Atlanta, said the biggest problem with new- auto lending remains the lack of inventory.
“Fix the supply chain issues and then 2022 will be fine,” he said.
Pinnacle had about $7.1 million in new-car loans on its books at the end of the third quarter, up about $400,000 from a year earlier.
Real estate lending in Atlanta is still a hot market, and Pinnacle and other credit unions around the country are now relying more heavily on mortgages as auto lending lags, according to Selke. Additionally, credit unions are adding new products to their loan portfolios, such as alternative payday lending, unsecured lending and subprime lending, Selke said.
Not so fast
Some short-term forecasts are not overly optimistic. New-vehicle retail sales for January are expected to decline compared to a year earlier, according to a
“Despite optimism towards the end of 2021 that diminishing supply chain disruption would result in more vehicles being delivered to dealerships, the new-vehicle supply situation has shown no meaningful improvement,” said Thomas King, president of the data and analytics division at J.D. Power.
However, Dawit Kebede, senior economist at the Credit Union National Association, said credit unions should expect to see improved overall loan growth this year as economic activity continues to expand and labor market conditions improve.
Demand for new vehicles has also been bottled up as a result of supply shortages over the last two years, he said.
“There are reports that indicate an improved supply of semiconductor chips, bringing total new-vehicle sales back to prepandemic levels," Kebede said. "Rising overall prices and potential interest rate increases are some of the challenges that will make loans a little bit more expensive compared to last year.”
Kebede said credit union financing for used-auto loans was a bright spot and showed an impressive growth rate last year — roughly twice the rate of growth the industry saw in 2019 and 2020.
“We believe conditions in the auto industry will improve in the later part of this year, partially satisfying pent-up demand for new cars and bringing better success for the credit union auto financing,” he said.
Vincent Hui, managing director at Cornerstone Advisors, said supply and demand will help auto lending this year as there is a pent-up demand for cars, and supply chain impacts are loosening.
“So things will be looking up for auto lending, and we are already seeing overall borrowing increase — although still below prepandemic levels,” he said.
Data driven
Pacific Service plans to capture its share of auto loans in 2022 by using data analytics to reach its members at their time of need, according to Lampson.
“We will need to get in front of them with a just-in-time offer to finance their next car and remind them why getting a loan and doing business with their credit union is better,” she said. “If we can earn their loyalty, we win their referrals and repeat business because we’re in their considered set when they have a need for a loan.”
For lenders, a seamless experience is crucial in the new digital world, with more people comfortable applying for loans online and even buying cars online. So, the successful players will have a frictionless process, with the opportunity to engage with a person live if needed, Hui said.
“The bigger challenge will be interest rates and how they could impact demand and institution balance sheets,” he said.
Rates are predicted to rise, leading to higher monthly payments for borrowers. That prospect may nudge people to buy now, while rates are still lower, but could have negative longer-term effects, Hui said.
Large banks clearly have an advantage over credit unions in new-auto finance on several levels, but some banks may be eyeing more lucrative lending opportunities, and that may open the door for community banks and credit unions, Hui said.
