Tim Kelly is president of Houston-based Auto Financial Group (AFG) and has more than 20 years of experience delivering solutions to financial institutions.
Here he shares five lessons that the coronavirus pandemic has taught lenders about vehicle financing and how paying attention to those can help credit unions position themselves for a successful year of auto lending ahead
1. Vehicle prices will continue to rise.
Vehicle prices rose steadily over the past decade. In 2010, the average new vehicle transaction price was $29,800 but by 2019 that number had risen to $37,000, an increase of almost 25%.
In spite of the economic disruption brought on by the coronavirus, that trend didn’t change in 2020. Inventory shortages due to manufacturing shutdowns and increased demand due to concerns about using mass transportation have only made the situation worse.
GM said its average transaction price in the fourth quarter was a record $41,886. The full-year average wasn’t significantly lower at $39,229, indicating that the trend will continue well into this decade.
2. Demand for vehicles will not slow down.
In spite of rising prices and economic disruption due to COVID-19, the demand for vehicles has remained strong. “The need for new vehicles is vastly outpacing the number of people who are saying that they have a decreased need for a car. There is still going to be demand for vehicles in the U.S.,” says Morgan Hansen, VP, Data Science at ALG. “We are drivers.”
There are also some workers who relied on public transit or ride hailing services in the past who now prefer to have their own vehicle because of concerns over the possible spread of the coronavirus.
Additionally, with widespread travel restrictions and limited options to spend money on things like dining out, movies, etc., many consumers who continued to work had disposable income to spend on a new and often more expensive vehicle than they may have purchased otherwise.
3. Americans prefer SUVs and trucks.
Americans’ preference for more expensive SUVs and trucks hasn’t changed in spite of the financial turmoil due to the pandemic.
A decade ago, about half of all new vehicles sold in the United States were trucks. Last year (2020), 75% were. According to Cox Automotive, 2.9 million pickups were sold last year, making up roughly 20% of the entire auto market. In fact, for General Motors sedans only made up about 10% of their sales in 2020, according to The New York Times.
4. Rising monthly payments lead to extending terms with greater risk of negative equity.
Extending terms, going up to as long as 84 and 96 months in many cases, has become the go-to solution to make monthly payments affordable. According to Experian, the average loan term in Q3 of 2020 was 69.68 months for new vehicles and 65.15 months for used.
As a result, borrowers often end up owing more than their car is worth and tied to a vehicle they may no longer want or need or rolling over the negative equity and starting a cycle of debt that is difficult to get out of.
5. Members need flexible and affordable vehicle financing options.
Everyone thought the disruption due to the pandemic would last a couple of months and that skip-a-pays would give members some relief but in 2021 the uncertainty continues. Truly affordable financing is necessary to help members manage rising monthly payments and potential financial disruptions.
Residual-based vehicle financing programs such as walk-away balloon loans and leases, can provide much needed flexibility for members. These alternative finance options offer a more affordable monthly payment with a shorter term. Additionally, the guaranteed future value shields borrowers from the risk of negative equity, more closely matches trade-in cycles and avoids tying them to an auto loan for almost a decade.
Residual based financing can also be used to lower payments for vehicle loans your credit union may be looking to re-finance. In the case of a delinquency or possible repossession the lower payment associated with this type of financing may be able to keep the member in their vehicle. Residual-based financing could also help members that are in severe negative equity situations break that cycle.
Would you like to learn more about auto industry trends and residual-based financing?
Watch the recording of the ALG post-COVID market outlook session as well as the AFG dealer and lender panels held in September 2020 as part of the AFG Virtual Conference.
Auto Financial Group (AFG), a Houston-based company, provides an online, residual based, walk-away vehicle ﬁnancing product called AFG Balloon Lending, as well as vehicle leasing and vehicle remarketing to ﬁnancial institutions across the United States. For more information about AFG call toll free at 877-354-4234, or visit www.autoﬁnancialgroup.com.