By Ray Birch
PHILADELPHIA—Direct auto loans are poised for a comeback, according to one auto industry expert who is crediting Tesla for some of that reversal.
And that isn’t the only trend that’s taking hold. Tim Yalich, head of auto strategy for Wolters Kluwer, also pointed out more credit unions have begun to securitize and sell portions of their auto loan portfolios as they seek to create greater liquidity.
While many CUs remain active in indirect lending, Yalich said the direct-to-consumer sales of vehicles to consumers without a dealer in the middle is also changing the model for financing.
“It might seem funny to say, but direct lending is making a comeback,” Yalich told CUToday.info. “EV cars are one of the reasons. Tesla is the prime example,” noted Yalich.
Member Behavior Changes
The evolution from selling cars through a dealership toward an online portal instead has become one of increasing comfort among consumers, some of whom are purchasing cars without even having driven them first.
“This is motivating lenders to work more directly with a platform or partner as opposed to selling cars via the indirect channel,” explained Yalich.
Tim Yalich
As CUToday.info reported here, Origence has launched a solution called FIDirect that is aimed, in part, at giving EV manufacturers one credit union lending option to work with.
Rising car prices, too, have consumers focused more on monthly payment than rate or term, leading them to find their vehicles on websites that often promote the recurring payment, Yalich noted.
As CUToday.info has also extensively reported, more car buying websites allow shoppers to search for a vehicle that fits into their monthly payment—letting the payment determine the type of vehicle they can afford to buy. Also, as CUToday.info has extensively reported, the challenge with indirect lending remains building additional relationships with those who have traditionally been one-and-done members.
The Liquidity Crunch
In addition to high new and used vehicle prices driving attention to monthly payments, it’s also one of the factors that have created a liquidity crunch among lenders as members have drawn down savings in search of higher yields, Yelich said.
Yalich explained that while lenders over the past year saw a decline in the number of auto loans made during the era when annual new car sales hovered near 17 million units, the sky-high prices have offset the slowdown and markedly increased the amounts being financed.
“The amount of money a lender needs to for each transaction is a lot higher than it used to be,” Yalich said. Reports indicate the average new car loan balance is above $50,000. “I am afraid what this might mean for lenders if auto lending volume, in the number of cars financed, comes back to what is has been before the supply chain problems. Everybody's going to have to increase their capital.”
One CU Response
In response, some credit unions are choosing to address the growing issue by selling off some of their portfolio to the secondary market, Yalich said.
“They'll go raise the cash from a securitization,” he said. “Now they have more funds available to keep that lending machine going. What's interesting here is credit unions typically hold their paper. They usually never go to reselling. But last year, for the first time, we really saw a lot more credit union activity here, maybe more than we have ever seen.”
An Improving Supply Chain
With supply chain issues improving, could the number of lending transactions markedly increase in 2023? Yalich said probably not.
“The supply chain is coming back a little bit,” said Yalich, noting that 2022 ended with annual car sales units near 14 million. He said credit union lenders should expect number to be about the same in 2023, or slightly higher.