By Ray Birch
ONTARIO, Calif.—Auto loan terms can't continue to be extended out longer and longer, so something has to change with financing and the way dealers sell cars to keep the price of vehicles affordable for consumers, points out CU Direct.
Brian Hamilton, VP of innovation and insights with the company, said the practice of lenders extending terms longer to keep pace with the rising price of new vehicles—now averaging nearly $33,000—can’t continue. Hamilton said lenders have fired the last bullet in the chamber when it comes to terms, with many lenders going out over 90 months now–and credit unions have been leading the way.
The major concern, emphasized Hamilton, is the big buildup of negative equity in cars across the nation, an issue CUToday.info has extensively reported.
“I think we have reached the juncture where we're not going to be able to continue to extend terms anymore to keep payments affordable for consumers as car prices rise,” said Hamilton. “Lenders have been able to adjust for the quickly rising auto prices by taking terms longer. There is just too much negative equity in cars today and it gets worse every time a borrower rolls negative equity into their next deal. We have reached a peak, so something's got to give.”
Rethinking the Options
Hamilton said that could mean automakers being forced to squeeze margins further in order to keep a lid on prices, or more creative finances. Most likely, he suggested, it’s going to require efforts from both ends.
“No one in the automotive ecosystem is happy with the current state because it creates more negative equity, and lenders are assuming greater risk,” Hamilton said. “So new models will have to be created among lenders and OEMs (original equipment manufacturers) in order for consumers to continue to turn in their cars and buy or lease a new one.”
Hamilton stressed a new sales approach from the automakers and dealers is needed.
“In the old model of OEM to dealer and the dealer to the buyer with the lender involved… there are five, six or seven different stakeholders within this transaction, all getting a piece of the margin,” said Hamilton. “That's not going to work anymore. Margins are going to have to get condensed in order to keep vehicles affordable for borrowers, so we have to figure out a new way to approach this.”
Brian Hamilton
A Key Role
Hamilton said CU Direct believes digital retailing is going to play a key role in a fundamental shift in the way auto buying and financing takes place.
“So we really look at this on two fronts, both digital retailing and also digital transformation,” said Hamilton. “Digital transformation of the process and digital retailing are two very different things. Digital retailing is the introduction of some of these digital retail models, which CU Direct is developing and bringing forward to our credit unions. The digital model puts fewer people in the process chain—that's one way to do it. The other way to get this done is through digital transformation, at the dealership level, the F&I level, and the lender level. It’s using technology to create more efficiencies in the process, such as digitizing our documents, improving efficiencies, reducing delays in the back end and funding…It’s eliminating much of the back and forth in a transaction, and developing tools to make everyone in this chain more efficient. This will allow everybody involved to maintain margin without having to continue to increase the price of the vehicle.”
2020 Vision on 2020
Turning to 2020, Hamilton said he expects overall automotive sales and credit union auto lending to be similar to 2019.
“I don’t think anyone is expecting to see significant growth in 2020,” said Hamilton, noting new car lending picked up in 2019 and that he expects credit unions will continue to excel in this area. “There are a lot of high-quality used cars continuing to come off-lease, and used lending is a sweet spot for credit unions.”
Overall, however, Hamilton predicted a lot of what happens in 2020 will depend on the overall economy. Many economists had been predicting a recession in 2020, while some of the latest economic indicators suggest that might not happen.
The Latest Data
The latest auto lending data show credit unions continue to march forward and capture greater overall share of the auto lending market.
Hamilton pointed out that while the overall number of car loans are down in 2019, total balances are up. CUs continue to inch closer to banks, with total open auto loan balances showing CUs standing at $351.8 billion at the close of Q2 2019 and banks at $371 billion.
The latest Top 10 Auto Lender list from CU Direct and AutoCount shows the more than 1,100 CU Direct credit unions on the CUDL auto lending platform collectively continue remain the No. 1 auto lender in the U.S., a position they have held since 2017. CU Direct credit unions have 894,925 loans collectively, while No. 2 Ally Bank has 834,744.