According to Callahan & Associates data, "Annual growth in auto loans was the fastest of any major loan product at U.S. credit unions, and the segment accounted for $369.8 billion in total balances at year-end 2018."
Yet in an environment of rising rates, with new vehicle prices increasing at a significant pace, and late model used vehicles becoming more popular, how does your credit union offer vehicle financing options that help your institution grow but are also affordable for your members, won't put them in a long-term loan and ultimately in a negative equity position? This article looks at residual based financing and how it can help provide a solution for this problem even as consumer preferences shift.
Wholesale sales trends in early 2019
Wholesale used vehicle sales volume was up 3% YOY in April. Additionally, according to Manheim’s Used Vehicle Value Index, wholesale used vehicle prices rose 4% in March 2019 compared to the same month in 2018 and continued to rise month over month in April by 1.81%. In contrast, demand for new vehicles — down 1.7% YOY in April — is softening. Wholesale trends typically indicate how dealers are planning their inventory in response to consumer demand, so these numbers are reflecting changing consumer preferences in 2019.
What consumers are looking for
Vehicles are becoming more expensive than ever given new features and technology. According to Edmunds.com, “The average price of a new car is expected to climb to $36,718 in April, the highest level seen so far in 2019.” At the same time, interest rates have been rising, with the Federal Reserve’s benchmark rate at its highest level in 11 years in April 2019.
The combination of these two factors is making monthly payments unaffordable for many consumers. This is therefore a likely explanation for the shift we are seeing this year toward used vehicles, which generally have a more affordable price tag.
In addition, starting in 2018 a wave of off-lease vehicles has been coming to market that are very attractive to consumers. According to Charlie Chesbrough, Cox Automotive’s senior economist, “the returning off-lease vehicles will contain a hefty share of CUVs, SUVs and pickup trucks ― the products consumers are most interested in.” So consumers are now in a position where they can buy used vehicles they like and still keep pace with the latest technology upgrades at a considerably lower price.
The opportunity for credit unions
As noted at the beginning of this article, auto lending is on the rise at credit unions. Members are increasingly looking at their trusted financial institution not just for the best rates but for financial products that will maintain or restore their financial health.
For this reason, credit unions should look at offering members a wide variety of choices beyond conventional loans to meet their needs. Residual based financing (RBF = walk-away balloon loan or a lease) can be a great option for credit unions and their members. RBF can help lower monthly payments ― the key is to look for a program that guarantees the residual value, provides a walk-away option, and can be used for both direct and indirect lending.
With a program of this kind a credit union can:
Offer a low payment financing option for used and certified pre-owned vehicles that are currently more in demand
Help members out of a negative equity situation by allowing them to refinance with a lower monthly payment and then walk away from the vehicle at maturity
Offer a workout loan to help the member avoid defaulting on the loan
Find out how implementing a residual based financing solution has benefitted Sound Credit Union and Deere Employees Credit Union and their members. Download the case study today.
Tim Kelly is president of Auto Financial Group and has more than 20 years of experience delivering solutions to financial institutions.
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.