The coronavirus pandemic has had a great impact on many sectors of the economy, vehicle sales have been no exception. Sales dropped by 24% in the first half of 2020, according to Cox Automotive.
Is this a good time for your members to buy a car? This question was recently put to Joe Leonard, vice president of indirect auto business development at PenFed Credit Union, in an interview. He said, “If you do your homework almost any time can be a good time to buy a car. As long as you’re prepared, you can buy a car the first of the month or the last of the month and you’ll basically get the same deal. There’s only so much profit in a car [for the dealer to cut].”
In spite of all the economic uncertainty, demand for new and used vehicles seems to be coming back online quickly, with many dealerships reporting shortages in new vehicle supply due to the combination of pent-up demand and auto manufacturing plants stopping production from mid-March to mid-May. This has caused an increased demand for certified pre-owned and used cars.
Kelley Blue Book even reports an increase of new vehicle average transaction price in June 2020 — up $1,141 or 3.1% — compared to the same month a year ago. And Karl Brauer, executive publisher of Autotrader and Kelly Bluebook, says, “Even when the vehicle market goes completely sideways, the truck market stays straight and true. Most brands are down between 20 and 30% this year, but trucks range from approximately half that decline. The Chevy Silverado is actually positive year to date in 2020.”
Given that there continues to be a healthy demand for more expensive and used vehicles, let’s look at financing options for borrowers during this crisis and the potential implications for them in the long run.
Vehicle Financing Trends
In this time of great uncertainty, your members are definitely looking to your credit union for support with flexible financing options.
There were 0% financing deals offered at the onset of the pandemic to stimulate vehicle sales. Offering 0% financing for 84 months, with little or no money down, however, reduces trade-in flexibility and increases the impact of negative equity.
A residual-based financing program, walk-away balloon loans and leases, are another possibility to offer a more affordable monthly payment with a shorter term. 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 refinance. The lower payment helps keep the member in their vehicle in the case of a delinquency or possible repossession by lowering monthly payments. Residual-based financing could also help members that are in deep negative equity situations.
In times of uncertainty, residual-based financing provides more flexibility to members. When asked why he chose to implement a residual-based financing program this year, Dennis Wizeman, Montana Health FCU’s CEO, said, “At Montana Health, we were looking for opportunities to build out a product suite that could help our members during the COVID-19 response. We knew that cash flows were going to be tight for our members and that uncertainty would be high, so offering an option that could help members mitigate cash flow demands even while making an essential purchase would be a great fit in our suite of relief products.”
Rising demand for residual-based financing products has also been demonstrated by Ford Finance’s recent announcement that they will be launching the Ford Option balloon program to support the launch and sale of their Mustang Mach-E model. Ford may expand this program to additional vehicle models down the road, which could have a direct impact on your conventional auto loan program.
The good news is that your credit union has access to this type of financing today through a provider like AFG via its walk-away balloon lending and leasing programs. Residual-based financing programs allow your credit union to offer members a lower monthly payment vehicle financing option and shorter terms at a time of great uncertainty.
Would you like to learn more about the benefits of residual based financing for your credit union? Watch the webinar.
Tim Kelly is president of Auto Financial Group and has more than 20 years of experience delivering solutions to financial institutions.
About Auto Financial Group
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.